Nov 24, 2011 06:06 PM

Construction Bank's Investor Deconstruction

A pair of Chinese government agencies that recently bought stakes in China Construction Bank are merely "general institutional investors" and will steer clear of management decisions.


That's what a source close to the state-run investment agency Central Huijin Investment had to say after one of CCB's largest investors, Bank of America, agreed to sell most of its remaining stake to government-backed investors.

Caixin learned that the Chinese government's sovereign wealth fund China Investment Corp. and the State Administration of Foreign Exchange (SAFE) agreed to buy most of the 4.14 percent CCB stake from BOA, with the deal slated to close in the fourth quarter.

Also agreeing to buy some of the 10.4 billion CCB shares from BOA on the Hong Kong Stock Exchange was the Singaporean government's sovereign wealth fund Temasek, a source told Caixin. The deal is expected to raise Temasek's stake to about 10 percent, making it the bank's second-largest shareholder after Central Huijin.

The CCB share reduction – the fifth since BOA's share cutbacks begin in 2009 – solidified the Chinese government's control of bank shares while slashing the U.S. bank's holding to a mere 0.86 percent.

BOA is one of several American banks that bought stakes in China's state-owned banks in recent years but started reversing course after the 2008 global financial crisis, selling stakes piecemeal to raise cash.

Another retreating investor is Goldman Sachs, which cut its stake in Industrial and Commercial Bank of China (ICBC), China's largest, in November by 1.75 billion shares to raise HK$ 8.6 billion. It was the U.S. investment bank's third ICBC share reduction since June 2009.

Scaling Back

Getting foreign banks on board as strategic investors gave Chinese banks an extra measure of credibility and helped them streamline public listing projects on foreign stock markets. Moreover, overseas investors helped Chinese bankers become better acquainted with western-style retail banking, risk management and personnel training.

But U.S. banks these days may be less interested in Chinese bank investments than rebuilding capital in the wake of the subprime mortgage market collapse in the United States, the subsequent global financial crisis, and today's ongoing European sovereign debt crisis.

U.S. banks and other financial institutions have reported substantial declines in revenues this year in the investment banking, asset management and securities underwriting sectors. 

Goldman, for example, reported a third-quarter net loss of US$ 428 million that it blamed on revenue declines, and then announced plans to sell 2.4 billion of its 10.1 billion H-shares in ICBC. It scaled down the plan, however, to maintain its status as the second-largest holder of H-shares, behind the Chinese government's National Social Security Fund. 

A bank executive told Caixin that some financially strained banks in the United States are now selling Chinese bank stakes in a desperate attempt to survive.

Separately, an executive at a large Chinese bank said U.S. bankers are getting out of China after finding it difficult to achieve strategic investment goals. In addition, foreign investors have been given little say in how China's state-owned banks are operate.

Caixin learned that U.S.-based Citibank recently tried to sell a portion of its 20 percent stake in the unlisted Guangdong Development Bank, but a price dispute scuttled the deal.

American banker expectations of further market liberalization and moneymaking opportunities in China proved too optimistic, some market observers said.

These explanations run counter to a statement by CCB President Zhang Jianguo following his bank's announcement of the BOA sell-off. He called the decision "normal market behavior."

"BOA is reducing CCB shares mainly for its own reasons, including capital ratio requirements as a systemically important financial institution," Zhang said. "So this is normal market behavior."

Offering a similar, it's-business-as-usual explanation was Bank of America Chief Financial Officer Bruce Tompson. "A lot of the CCB stake sale decision was in line with our stated objective of building a strong balance sheet," he said, adding that cash from the sale will raise BOA's Tier 1 core capital by about US$ 2.9 billion.

BOA has sold US$ 2.6 billion worth of CCB stock since becoming a shareholder in 2005. The November sale announcement came just three months after the bank promised to maintain at least 5 percent of CCB shares as an strategic investor after it sold 13.1 billion shares in August.

State of Control

Some bankers in China argue that domestic banks benefit from the checks and balances afforded by diverse equity shareholding and foreign bank involvement.

So as BOA and other strategic investors step back, and government entities step forward, questions have been raised about future operations, equity structures and corporate governance strategies for CCB and other Chinese, state-owned banks.

"How Chinese banks move forward is a question worthy of attention," said one Chinese bank executive. 

What's clear is that government agencies have tightened their already firm grip on CCB. Central Huijin remains the largest holder of CCB H-shares, with about 60 percent as of November, up from 57 percent when the bank filed its third-quarter financial report September 30.

SAFE, which oversees the Chinese government's foreign currency reserves, plans to buy its BOA shares through an  offshore special purpose vehicle.

This unnamed SPV also was among the government-linked buyers of CCB shares sold by BOA last summer, according to a source closed to CCB. Others included Temasek, the National Social Security Fund and the state-owned  brokerage CITIC Securities. 

Temasek's willingness to sink money into Chinese state banks dates to mid-2005, when the Singaporeans paid Central Huijin US$ 1.4 billion for a 5.1 percent stake in CCB. Seven months later, Temasek bought a 5 percent stake in Bank of China for US$ 1.5 billion.

Temasek has increased its CCB holdings several times in recent years while selling off Bank of China shares, most recently in July.

An investment source familiar with Temasek said the fund is interested in Chinese banks for their profit potential alone. A CCB source said Temasek has not asked for a seat on the bank's board, nor did it contact CCB directly before striking the deal with BOA.

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