http://www.iht.com/articles/2006/10/23/bloomberg/sxgoldman.php

Goldman Sachs Group has managed to do in China what nobody on Wall Street has done anywhere: earn almost $4 billion from a six-month-old investment.

That, at least, is the profit so far on the $2.6 billion that Goldman put up for about 5 percent of the Industrial & Commercial Bank of China, or ICBC, the largest bank in China. The bank's record initial public offering now values ICBC at $129 billion.

While Goldman and investors in its private equity funds are prohibited from selling their ICBC shares for three years, the gain of $3.9 billion would be the biggest for Goldman on any trade since it was founded in 1869, according to people with knowledge of Goldman's investments.

The ICBC grubstake is "a move that Goldman wouldn't have made in the old days because it didn't have the interest or the experience or the capital or the nerve to make those kinds of investments," said Roy Smith, a finance professor at New York University in Manhattan, who ran Goldman's London office in the 1980s.

The China bonanza is the result of more than 70 visits by Henry Paulson, the former Goldman chief executive, who became the 74th US Treasury Secretary last June.

Goldman is poised to earn more fees than its global competitors in the world's most populous country because it is the only foreign securities firm allowed to both trade stocks for brokerage clients and arrange share sales for companies.

Goldman, which has been the most-profitable securities firm since 2004, relied on its principal investments for $1.4 billion, or 5.1 percent, of its revenue in the first three quarters of this fiscal year. The company purchased in April the stake in ICBC, whose shares start trading Friday.

"At this point, the investment looks great but Goldman isn't cashing out of the deal," said Jay Ritter, a professor of finance at the University of Florida in Gainesville. "There is still political risk," as well as an unpredictable business and legal environment in China, he said.

Unless the stock market plummets, Goldman's ICBC profit would dwarf the $1 billion that the billionaire George Soros pocketed in September 1992 from his bet against the British pound. Goldman's expected bounty also surpasses the $3.7 billion that it has secured in less than four years from a $1.28 billion investment in Sumitomo Mitsui Financial Group, the third-largest bank in Japan. Goldman recorded a $261 million profit from the stake in the Tokyo-based bank in its third-quarter revenue statement.

The ICBC windfall also exceeds the more than $1 billion that Goldman and its rival, Morgan Stanley, shared last year from selling stakes in Ping An Insurance, of China, a stake they bought for $70 million in 1994.

The Sumitomo Mitsui and ICBC deals were financed with a combination of Goldman's own money and investments by partners, institutions and wealthy clients. About $1.65 billion, or two-thirds, of the investment in ICBC was from funds managed by Goldman as of Aug. 25 and the rest was the firm's capital.

China gave Goldman favorable terms for the stake in ICBC because of an understanding that Goldman would cooperate on business ventures with ICBC, said Ritter of the University of Florida. "They weren't merely passive financial investors because they're putting their sweat equity into the deal as well," he said.

Lucas van Praag, a Goldman spokesman, said the ICBC stake is a "strategic investment." He declined to comment further.

Allianz, of Munich, the largest European insurer, and American Express, of New York, the fourth-biggest US credit-card issuer, together bought $1.24 billion of ICBC shares before the $19.1 billion initial public offering. Like Goldman, they are also poised to more than double their money.

Shares of Bank of China, China Construction Bank and The Bank of Communications appreciated 70 percent on average since they sold shares to the public in mid-2005.

Bank of America earned more than $1 billion from an investment in China Construction Bank and Royal Bank of Scotland Group showed a $1 billion profit from Bank of China during the past one-and-a- half years.

In all, 53 banks have gone public worldwide since the beginning of 2003, according to data compiled by Bloomberg. Only 11 are trading below their initial offering valuations.

The $2.2 trillion Chinese economy grew 10.4 percent in the third quarter from a year earlier. It has expanded at an annual rate of more than 6 percent and outpaced the United States and Europe every year since 1991. The nation's stock market may quadruple to $1.9 trillion by 2010 from $402 billion at the end of 2005, according to a Sept. 15 report published by Credit Suisse Group, of Zurich.

Global financial companies, including UBS of Zurich, Bank of America, in Charlotte, North Carolina, and HSBC Holdings, based in London, have spent $19 billion since 2001 for stakes in Chinese commercial banks as the government opens the capital markets by selling shares to investors.

Goldman also is competing to break into nascent investment banking market in China. Two years ago, Goldman locked in its ability to sell and trade securities in mainland China when it spent about $200 million to set up the brokerage Beijing Gao Hua Securities and an investment-banking affiliate.

To operate an investment bank in China, overseas firms need a license to underwrite stock and bond sales. They need a separate brokerage license to trade securities. Only Goldman; BNP Paribas of France; and CLSA, the biggest independent brokerage in Asia; have underwriting licenses and just Goldman has an operating brokerage license as well.

Foreign firms are restricted to owning 33 percent of an investment banking venture and 20 percent of a brokerage. China last month closed the window on future partnerships by barring any more overseas firms from buying domestic brokerages.

By signing up a veteran banker, Fang Fenglei, as a partner and providing a loan to create Gao Hua, Goldman obtained the underwriting and brokerage licenses and practical control of the venture without violating Chinese restrictions on foreign ownership. Fang, 54, co-founded China International Capital, the country's first investment bank, in 1995 and ran the securities unit of ICBC. He now runs Beijing Gao Hua.

"Goldman's current foot in the door allows them to build up the necessary infrastructure for the future," said Glenn Henricksen, who previously worked at Bear Stearns. and now heads CIF Consultants in Hong Kong, which specializes in providing advice on credit risk.

UBS, the biggest Swiss bank, plans to buy 20 percent of a Chinese securities firm for $210 million to gain underwriting and brokerage licenses. UBS's partners have won preliminary approval to set up UBS Securities.

Merrill Lynch, Morgan Stanley and JPMorgan Chase, all of New York, have said they want to set up local firms.

Goldman this year won its first underwriting assignment for an initial public offering in mainland China. Next year, the company will help arrange a $4.1 billion sale in Shanghai for Ping An Insurance.

China International, in Beijing, now run by Levin Zhu, son of former Prime Minister Zhu Rongji, is the leading underwriter on the mainland this year with $2.07 billion of deals, Bloomberg data show. China International was among five firms picked to arrange the ICBC share sale.

"Goldman simply doesn't have the branch coverage to compete with Chinese brokerages," said Fraser Howie, co-author of "Privatizing China: The Stock Markets and Their Role in Corporate Reform," published in 2003 by John Wiley & Sons.

The question is "whether there will be preferential treatment for large, established Chinese brokers," he said.

This year, Goldman ranks second behind UBS in underwriting shares of Chinese companies outside the mainland, according to Bloomberg data. Goldman and UBS both worked on $11.2 billion initial share sale of the Bank of China in June. UBS also advised BP on the sale of a Russian affiliate to China's Sinopec in a deal valued at about $3.5 billion.

Goldman opened offices in Beijing and Shanghai in 1994 when it became the first overseas firm to get a license to trade dollar-denominated Class B shares on the nation's stock markets.

The company, which now has about 140 bankers on the ground, promoted Richard Ong, 41, this month to run investment banking in Asia, including Goldman Gao Hua.

Paulson, 60, led Goldman in cultivating government officials since the mid-1980s. Paulson helped set up a nature reserve in Yunnan Province. His onetime deputy, John Thornton, got to know a former Chinese president, Jiang Zemin, when Jiang was mayor of Shanghai in the mid-1980s, said Smith, the former Goldman partner. Thornton, 52, left in 2003 to become the first non-Chinese professor at Tsinghua University in Beijing.

"The Chinese government views Goldman as a very important and reliable business partner," said Fang Zheng, a partner of Neon Capital Management, a New York firm with $450 million invested in emerging markets including China.

Goldman now earns about 60 percent of its revenue in the United States, according to its financial statements. The company's chief financial officer, David Viniar, told analysts in June that "non-US businesses are growing faster than the US businesses, with Asia growing the fastest." He did not address China or Asia in his third-quarter presentation in September.

Paulson told investors at a conference in New York last November that "as fast as this business is growing, we don't believe it can be a meaningful percentage of our revenues in the near term. But looking out five years, if things develop as we hope, China may be an important contributor."