Temasek/CCB: Temasek’s trading in China Construction Bank may be too clever for its own good. The Singaporean state investment fund is buying part of Bank of America’s (BofA) 10 per cent stake in the lender, at a valuation 21 per cent below where it dumped CCB stock less than two months earlier.
This looks financially smart. But, such short-term opportunism may hurt Temasek’s reputation as a long-term investor. The timing of both Temasek’s exit and re-entry was tactically shrewd. The fund pared its holdings in CCB and another Chinese bank in July, before lock-ups expired on BofA’s own CCB holding on August 29. With BofA under pressure to strengthen its finances, Temasek is now buying part of its CCB holding at an 11 per cent discount to the shares’ last trading price — itself down 11 per cent from the level where Temasek sold.
The Singaporean fund could have made a trading profit of $250 million, assuming it is buying back all the 1.5 billion shares it sold in July for $1.2 billion. BofA is getting a taste of its own medicine. In 2008, the U. lender exercised a call option to buy 19.6 billion CCB shares well below their market price, which it was restricted from selling until 2011. Months later, it sold an existing stake in CCB for a gain of $7.3 billion.
That irritated the Chinese authorities, according to people close to the matter. By the same token, Beijing is unlikely to take kindly to Temasek’s behaviour. One difficulty for Temasek is the impression the disposal of a big slab of CCB stock put pressure on the bank’s shares ahead of BofA’s likely entry into the market as a semi-forced seller. Moreover, Temasek already has plenty of cash — almost $33 billion at the end of March 2010, according to Standard & Poor’s. It hardly needed the money.
The sovereign fund’s reputation as a passive investor with a long view has helped it win lucrative deals in China. Temasek was among the earliest foreign investors of China’s “Big Four” banks. But, even before the flip-flopping with CCB, there was a view in China that so-called foreign strategic investors were acting more like speculators. A potential backlash in China could now hamper Temasek’s access to deals in a market where government approvals can be quite arbitrary. China will find it hard to turn down Temasek’s cash the next time it is needed. But, there is still the risk for Temasek that its short-term financial gain comes with a lingering strategic cost.
