Bank of America investment key deal for China

BEIJING — Bank of America's decision to buy a major stake in China's largest mortgage lender, announced early yesterday, is a major shot in the arm for China's creaky and debt-laden financial system and may be key to its reform, analysts say.

"It means that this highly monopolized sector is taking big steps to open to foreign investors," said Ba Shusong, an expert at the Research and Development Center of the State Council, which functions as Premier Wen Jiabao's Cabinet.

The $2.5 billion deal, in which Bank of America will own 9 percent in the state-run China Construction Bank (CCB), is the single largest foreign investment in a Chinese company. Bank of America has the rights to boost ownership to 19.9 percent in the near future.

Analysts said such megadeals are linking the economies of China and the United States more tightly, potentially mitigating political conflicts, even as trade frictions between the two countries rise and Washington, D.C., voices concern over China's growing military strength.

Bank of America Chairman and Chief Executive Officer Kenneth Lewis said high economic growth has made China impossible to ignore.

"It has been one of the fastest-growing economies in the world," Lewis said. "I just see the Chinese economy becoming more and more important."

The deal between Bank of America, the United States' third-largest bank, and CCB, marks the first major foreign investment in one of China's "big four" state-run banks.

It also gives CCB access to foreign expertise months before China's banking sector must open to foreign competition under international trade commitments.

China's leaders are keen to draw investment to legitimize debt-saddled state-run banks with a history of bad lending and corrupt practices. Many foreign banks have been reluctant to invest because China offers little direct management control.

Lewis said Bank of America would send at least 50 advisers to help CCB improve its screening of loans and upgrade its information technology.

The advisers "will be people attempting to give CCB the benefit of our experience in specific areas," Lewis said, adding that "they will just be advising," and not managing, the bank.

Bank of America will get one seat on the China Construction Bank's board of directors, he said.

Barely three months ago, China Construction Bank was mired in scandal when then-CEO Zhang Enzhao left the bank amid allegations that he pocketed $1 million in a kickback scheme for an information-technology system.

The new chairman of China Construction Bank, Guo Shuqing, a respected former foreign-currency official, vowed yesterday to clean up bad loans and move the institution "from a state-owned policy bank to a true market-driven commercial bank" as it aims for an overseas stock listing later this year.

CCB says it has 15,401 branches in China and six overseas locations, and employs 263,000 full-time staff members. It offers checking and savings accounts as well as credit cards. It recently launched a pilot program for a "Happy Investor" wealth-management program.

Despite new services, many banks in China have yet to offer customer-friendly service. Credit cards and personal checks are unfamiliar to most Chinese.

Much of CCB's business is in property lending and financing of major construction projects rather than retail banking.

"If you look at its loan quality, it's really quite high," said Dorris Chen, a banking analyst at BNP Paribas Peregrine's Shanghai office. "Cash flow is really quite stable."

Chen said Bank of America's expertise might help CCB improve its internal risk control so that bank headquarters can know if various branches are lending to the same customer, allowing the customer to build up excessive debt.

U.S. trade ties with China are huge, leading to a $162 billion trade deficit last year. Wal-Mart alone purchased some $18 billion worth of products from China. As U.S. corporate investment in China increases, Chinese companies also are showing interest in buying U.S. companies, enmeshing the two economies.

Last month, Chinese computer giant Lenovo completed its $1.25 billion purchase of IBM's unprofitable personal-computer unit. Just Wednesday, China's biggest manufacturer of large appliances, Haier, said it may want to buy Maytag, the struggling U.S. appliance maker.

One analyst said he thinks the Bank of America investment, along with other economic links between China and the United States, could have political ramifications.

"Having one of the biggest U.S. banks invest in one of the largest banks in China should help political ties," said Bill Stacey, a banking analyst at Credit Suisse First Boston's office in Hong Kong.