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More foreign banks using Chinese lenders

Foreign banks are planning to make large investments in China's leading lenders as they jockey for position ahead of late 2006, when China fully opens its markets to overseas competition.
/ Source: The Associated Press

Foreign banks are planning to take large stakes in China’s second largest bank and a mid-sized regional Chinese lender as they jockey for position ahead of late 2006, when China fully opens its markets to overseas competition.

The Royal Bank of Scotland Group PLC announced Thursday a $3.1 billion investment in Bank of China that will give the British bank control of a 10 percent stake.

RBS is contributing $1.6 billion of the investment in Bank of China, the country’s second largest bank, giving it a direct stake of just over 5 percent. But it will take control of the full 10 percent on behalf of co-investors Merrill Lynch & Co. and Li Ka-shing, the Hong Kong-based tycoon who controls the conglomerate Hutchison Whampoa Ltd.

The announcement followed weeks of speculation that RBS, Europe’s second largest lender, would take up a stake in the Chinese bank. RBS Chairman George Mathewson said the group had no plans to increase the size of its investment.

“We control the 10 percent and that gives us access to this market place in a way we haven’t had in the 10 years that we’ve done business in China,” RBS Chief Executive Fred Goodwin said.

“We’ve had modest activity in corporate banking and wealth management, but now we’re getting access to Bank Of China’s distribution channels, and there is great potential for collaboration, which would have been inconceivable without the partnership,” he added.

The deal, which is subject to regulatory approval, will give RBS access to a bank with 11,307 branches, a 12 percent share of the loan market in mainland China and 14 percent of the savings market.

Meanwhile, Deutsche Bank and Singapore’s DBS Group plan to buy shares in China’s state-owned Guangdong Development Bank, an official newspaper said, but denied reports that the foreign banks will take a controlling stake.

The two foreign banks plan to buy a total of 10 billion shares worth 17.7 billion yuan ($2.2 billion) in the mid-sized bank based in southern China, the China Daily reported.

But it quoted an unnamed “insider” as saying the bank, which has been trying to restructure after a near collapse in the 1990s, would not sell a majority stake to foreign investors.

The report could not be immediately confirmed.

DBS staff in China said they could not comment on their bank’s reported interest in Guangdong Development Bank.

A Deutsche Bank spokeswoman in Frankfurt said the bank was acting as a financial adviser to the Guangdong bank in its restructuring. She would not comment on the report Deutsche Bank might buy a stake in the bank. Officials at the Guangdong Development Bank refused comment.

China wants to raise money to modernize its state-owned banking industry by selling minority stakes to foreign investors while retaining control of the institutions. All of its major commercial banks are planning to sell shares abroad.

Chinese law limits foreign shareholders to a total of not more than 25 percent equity share in its state-owned banks. Individual foreign banks can only hold up to 20 percent shares.

Although those limits might be relaxed on a trial basis for some banks, that hasn’t happened yet, the China Daily article said.

Allowing foreign banks to take majority shares, and thus gain managerial control, might help attract investment in weaker lenders most in need of help.

Guangdong Development Bank appears to be among the banks singled out for extra support.

According to mainland media reports, the Guangdong provincial government plans to inject 20 billion yuan ($2.5 billion) into the bank to boost its own controlling stake. The central bank also is planning to boost the bank’s capital, the report said.

After its restructuring is completed by the year’s end, the bank is due to list its shares, the reports said without specifying which market.

At the end of last year, Guangdong Development’s assets totaled 344.5 billion yuan, or about $42.5 billion.

Earlier this week, reports said the government was reviewing proposals to sell a majority stake in the bank to foreign investors.

The Financial Times said regulators were considering a deal that might let the foreign institutions take up to 51 percent of Guangdong Development’s shares through local joint ventures.

U.S. private-equity group Newbridge Capital Ltd. took a controlling stake in Shenzhen Development Bank last year, but it holds 17.9 percent of the Chinese bank’s equity, well within current limits.

In the biggest deal to date, Bank of America agreed to buy a 9 percent stake in China Construction Bank for $2.5 billion, plus an additional $500 million when the state-owned Chinese bank sells shares to the public later this year.

Last year, Britain’s HSBC acquired a 19.9 percent stake — the maximum allowed for a single foreign investor — in Shanghai-based Bank of Communications, with an agreement that its stake could double after 2008 if regulations change.