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updated 5/31/2004 12:13:13 PM ET 2004-05-31T16:13:13

China's Shenzhen Development Bank Co. has agreed to sell an 18 percent stake to U.S. private equity firm Newbridge Capital Ltd., a rare deal giving effective control of a state-owned mainland bank to a foreign company.

Newbridge's purchase is the first acquisition of a controlling stake in a state-owned local bank by a foreign company. Shenzhen has been leading reforms aimed at reducing government ownership in state-owned enterprises.

A notice by the bank, published in the state-owned China Securities Journal on Monday, said negotiations on the long-awaited deal ended over the weekend.

Four government entities in Shenzhen, a boomtown bordering Hong Kong, are to transfer their stakes to Newbridge, giving it a 17.89 percent stake, the notice said. It did not give financial terms for the deal, which requires approval by banking regulators.

A final agreement is to be signed soon, the notice said.

The deal appears to be part of an effort to bring foreign involvement into banking management to help modernize a state-owned banking industry that lags decades behind its foreign competitors.

Foreign financial institutions have also been rushing to acquire strategic holdings in China's banks ahead of the full opening of the banking sector to foreign competition in 2006.

Newbridge, an affiliate of major American private equity firm Texas Pacific Group, began talks with Shenzhen in September 2002. But the deal ran into trouble when Newbridge accused the Chinese side of breaking its agreement and trying to sell their shares to a Taiwan company, Chinatrust Financial Holding Co. Those conflicts have apparently been resolved.

In March, China Minsheng Banking Corp., the country's first privately held bank, announced plans to sell a 4.8 percent stake to Newbridge. Newbridge also has a stake in Korea First Bank and in Japan Telecom Co.

Copyright 2004 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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