Share sales "don't shake relations" between Chinese, foreign banks

    The analysts said recent sales of stakes in such institutions as the Bank of China (BOC) and China Construction Bank (CCB) represented an effort by the foreign holders to relieve their domestic financial stress. And the banks on both sides of several transactions said the foundation for further cooperation remained solid.

    Several transactions have been making headlines, with foreign lenders, including the Royal Bank of Scotland (RBS) Group and the Bank of America (BOA), having reportedly either sold or considered selling stakes in large Chinese commercial banks.

    United Bank of Switzerland (UBS) sold 3.378 billion H-shares in BOC on Dec. 31, when the lock-up period expired.

    This Wednesday, there were two similar transactions. Hong Kong tycoon Li Ka-shing sold 2 billion of his total 5 billion shares in the BOC for up to 524 billion U.S. dollars through Merrill Lynch.

    And BOA, the second-largest shareholder in CCB, cut its 19.13 percent stake in the Chinese bank to 16.72 percent by selling 5.62 billion CCB shares for 2.8 billion U.S. dollars.

    On that day, overseas media reported that the RBS group was discussing divestment of its 4.3 percent stake in BOC. The state-controlled UK lender bought 8.25 percent of BOC's H-shares in 2005 with Li's Magnitico Holdings Ltd. and four other investors.

    The BOC had a 16.85-percent stake purchased by four foreign strategic investors in 2005 before its initial public offering on the international market, including the RBS-led group, UBS, Singapore-based Temasek Holdings and the Asian Development Bank. Their lock-up periods all expired at the end of 2008.

    NORMAL MARKET ACTIVITIES

    Zuo Xiaolei, chief economist with Beijing-based Galaxy Securities, described the recent selling as "completely normal market activities," saying Chinese lenders should remain confident about their prospects.

    "The Bank of America made the decision to reduce its stake because of its own financial difficulties," said a statement on CCB's website. The statement said the move would not affect BOA's status as CCB's second-largest shareholder.

    BOC spokesman Wang Zhaowen shared that view. It was "normal" for UBS to sell BOC shares after the lock-ups ended, he said. "It is up to the bank to choose whether it will continue to hold the stake or trim its holding."

    He said BOC's operation and businesses would not be affected by the deal as the bank had been performing well. 
 BALANCE-SHEET CALCULATIONS

    Analysts agreed that the decision of troubled foreign lenders to sell down stakes in Chinese banks was intended to improve their own balance sheets -- and perhaps make a profit.

    Guo Tianyong, professor with the Central University of Finance and Economics, told Xinhua that battered foreign banks urgently needed funds to combat the impact of the financial crisis.

    For example, Guo said, BOA faced a tight financial situation because of its purchases of Merrill Lynch and Countrywide Financial at a time of economic turmoil. "The lender was forced to offload stakes in Chinese lenders to raise cash," he added

    BOA's third-quarter results show net revenue of 180 million U.S. dollars, sharply down from 3.7 billion U.S. dollars a year earlier.

    Lu Suiqi, vice director of the China Financial Research Center of Peking University, said some foreign lenders needed funds to offset ugly results elsewhere.

     Lu said the sales would bring impressive profits as the Chinese banking industry had been growing steadily. For example, BOA netted 2.8 billion U.S. dollars from its transaction, while the LiKa-shing Foundation gained 4.06 billion Hong Kong dollars (about 520 million U.S. dollars).

    With lock-ups expiring, Chinese banks would face more sales, Lu said.

    Guo said it was unlikely that in the long run all foreign lenders would sell their stakes in Chinese banks after lock-ups ended, as China and its banking industry had relatively little exposure to the financial crisis compared with their Western counterparts.

    Foreign investors also expressed their confidence in China's financial market. BOA had repeatedly pledged it would not abandon "the market with the biggest potential for growth" or the opportunity for mutual beneficial business with CCB, a CCB spokesman said Wednesday.

    Li Ka-shing's foundation also referred to the selling of BOC shares as part of its routine asset and capital deployment, saying it would hold the remaining 3 billion BOC shares as a "long-term investment."

    WARNING ON CAPITAL FLIGHT

    Shi Chenli, investment banking analyst at the Industrial and Commercial Bank of China, warned Chinese lenders to be cautious when offering stakes to foreign investors in the future, to prevent possible losses caused by capital flight.

    "Apart from selling stakes to investors, we could consider share swaps as a way to secure long-term investment," Shi said.

    He suggested Chinese banks should map out plans for foreign divestment. "Large-scale stake sales should be divided into phases. Further, business cooperation and technical support should not cease altogether."

    In cases where foreign investors wanted to transfer their stakes to a third party, Chinese lenders should ensure that the investor would offer equal or better terms for partnership, according to Shi.