updated 6/17/2005 8:03:54 AM ET 2005-06-17T12:03:54

Bank of America signed an agreement Friday to buy a 9 percent stake in state-owned China Construction Bank for $3 billion, the largest single purchase of stock in a Chinese bank by a foreign financial institution.

Charlotte, N.C.-based Bank of America Corp.'s stake in China's second largest bank is the latest move by an international lender to grab a strategic shareholding in China's banking industry.

Other global banks such as HSBC Holdings PLC, Citigroup Inc. and the International Finance Corp. _ the lending arm of the World Bank _ have also been seeking strategic partnerships as a way to tap the potentially huge Chinese market.

"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 D. 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.

Bank of America has the right to increase its stake in the Construction Bank to up to 19.9 percent over the next five-and-one-half years, the statement said.

China limits foreign investment in its big state-owned banks to a maximum of 20 percent for any single institution, and 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 in 2006 that is expected to raise $5 billion to $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 2006.

Under the agreement, Bank of America would provide expertise in risk management, credit cards and consumer banking, Lewis said.

Risk management is an especially urgent issue for mainland 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, 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, 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."

The Construction Bank says it has 3.9 billion yuan ($472 billion) in assets and 3.5 trillion yuan ($422 billion) in deposits. It has a national network of 14,500 branches and is China's second-biggest mortgage lender.

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

Bank of America has corporate banking offices in Beijing, Shanghai and the southern city of Guangzhou and operates a bank in Hong Kong with 16 offices.

Copyright 2005 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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