US firm to take stake in China Construction Bank

Bank of America announced yesterday that it will take a stake of about 9 percent in state-owned China Construction Bank (中國建設銀行), making it the latest international lender to grab a strategic shareholding in China's banking market.

Bank of America Corp said it would pay US$3 billion (euro2.5 billion) for the 9 percent stake in China's second-largest bank, with an option of increasing its holdings in the future.

The deal is the largest single purchase, so far, of an equity stake in a Chinese bank by any one foreign lender.

China limits foreign investment in its big state-owned banks to a maximum of 20 percent for any single institution. Total foreign holdings are capped at 25 percent.

The Beijing-based China Construction Bank, one of China's four biggest state-owned commercial banks, earlier announced it was seeking one to three strategic investors as it prepares for an initial public offering in Hong Kong later this year or next year that is expected to raise US$5 billion to US$10 billion.

China has been taking various measures, including restructuring and trying to list shares of its major state-owned lenders, to strengthen the banking system before the sector opens fully to foreign competition in December next year.

"This investment is aimed at creating a long-term benefit by partnering with the best positioned bank in China, which is one of the fastest growing economies in the world with 1.3 billion consumers," Kenneth Lewis, Bank of America chairman and chief executive officer, said in a statement.

"It makes sense, if you are looking to tap into economic growth, to consider an investment in China," Lewis said.

He said that under the agreement, Bank of America would provide expertise in risk management, credit cards and consumer banking.

Risk management is an especially urgent issue for Chinese banks. Their main clientele, state-owned companies, frequently have defaulted on loans, saddling lenders with massive bad debts that are gradually being sold off as the banks restructure.

All the major lenders have been ordered to beef up controls against fraud and other abuses after being caught up in corruption scandals that resulted in huge losses.

One Construction Bank deputy branch manager was executed last year after being convicted of using bank funds to support eight mistresses. The Construction Bank's chairman, Zhang Enzhao (張恩照), stepped down in March for what the bank said were personal reasons. State media reports said he was accused of taking bribes in a lawsuit filed in California.

"The most fundamental and challenging task in transforming CCB is to establish a culture that is customer-centric and market driven," Zhang's replacement Guo Shuqing (郭樹清), the former head of China's foreign exchange administration, said in a statement.

"We have much to learn from our partner in serving customers and creating shareholder value," Guo said.

The Construction Bank reports 3.9 billion yuan (US$472 billion) in assets and 3.5 trillion yuan in deposits. It has a national network of 14,500 branches and is China's second-biggest mortgage lender.

Bank of America, which is based in Charlotte, North Carolina, will initially buy Construction Bank shares from its government-run majority owner, China SAFE Investments, for US$2.5 billion and will have the right to make an additional purchase worth US$500 million when the Construction Bank lists shares in Hong Kong, the statement said.