Investors' Group to Acquire a Stake in Bank of China - New York Times

Investors' Group to Acquire a Stake in Bank of China - New York TimesAugust 19, 2005
Investors' Group to Acquire a Stake in Bank of China
By DAVID BARBOZA
SHANGHAI, Aug. 18 - A group of investors led by the Royal Bank of Scotland and Merrill Lynch, two of the world's biggest financial institutions, has agreed to pay $3.1 billion to acquire a 10 percent stake in the Bank of China, one of this country's big four state-owned banks.

The Royal Bank said Thursday that it would pay $1.6 billion and that Merrill Lynch and the charitable foundations of Li Ka-Shing, the Hong Kong billionaire, would pay $1.5 billion for a share of the Bank of China.

The investment would be the largest ever by foreigners in China's troubled, but potentially lucrative, state-owned banking sector. The move comes as some of the world's largest banks and financial institutions scramble to purchase stakes in China's biggest banks ahead of planned public stock offerings over the next few years.

The Bank of America said in June that it would pay $3 billion to acquire a 9 percent stake in the China Construction Bank, which plans to go public later this year. And Goldman, Sachs and the German bank Allianz are in talks to pay about $1 billion for a stake in China's largest state-owned bank, the Industrial & Commercial Bank of China, according to people briefed on the talks.

The Guangdong Development Bank, another state-owned entity, has plans to allow two foreign banks to pay about $2 billion to acquire a stake in its operations, according to Xinhua, the Chinese news agency.

But analysts have warned repeatedly that foreign banks and investors are taking a big chance in buying into China's banking system, which has been plagued by corruption, bad loans and mismanagement.

Among the most serious problems at Chinese banks is the huge amount of debt accumulated in the last decade by making loans to poorly run state-owned companies. In the last few years, newspapers have been filled with reports of Chinese banking officials who have absconded with hundreds of millions of dollars or been jailed after investigations.

This year, the head of the China Construction Bank resigned after a lawsuit was filed accusing him of accepting bribes. And last week, Liu Jinbao, the former chief executive of the Bank of China's publicly traded subsidiary in Hong Kong, was convicted of embezzlement and given a death sentence, which was suspended. Mr. Liu, who for years was one of China's best-known bankers, was convicted of taking $173,000 in bribes and embezzling $2.7 million.

But analysts say the Chinese government has been stepping up pressure on the nation's biggest banks, pushing them to tighten their operations and clean up their books in preparation for public stock listings.

The government also wants those banks to be more competitive ahead of opening the banking sector to foreign competition in 2007. Indeed, China has spent more than $70 billion in the last few years to bail out and restructure some of the major banks.

On Thursday, the Royal Bank of Scotland said its investment would lead to a partnership with the Bank of China. The banks have agreed to cooperate on wealth management services, credit cards and corporate banking.

They also plan to work together on corporate governance, risk management and information technology, with the Royal Bank even nominating a director to sit on the board of the Bank of China.

The group of investors led by the Royal Bank said they would hold onto their investment in the Bank of China for at least three years. And the Royal Bank said it had no plans to increase its stake.

Some analysts praised the deal.

"This is a win-win deal for both Bank of China and the Royal Bank of Scotland," said Sun Lijian, a professor of finance at Fudan University in Shanghai. "Foreign bank investments are very welcome in Chinese banks, as it solves their problems of capital shortage."