Another example of unbridled globalism from the pages of the Charlotte Disturber. I predict they will rue the day they wandered into this nest of snakes - Scarecrow


BofA invests $3 billion in China bank

Wins entry to vast, risky market

BINYAMIN APPELBAUM & RICK ROTHACKER

Bank of America Corp., seeking to profit from the booming Chinese economy, will spend $3 billion for a 9 percent stake in one of China's largest banks, the company said late Thursday.

The Charlotte-based bank said it will purchase $2.5 billion in shares of the state-owned China Construction Bank and another $500 million when the Chinese bank sells shares to the public later this year.

It is the largest foreign investment in a Chinese bank.

The deal takes Bank of America into a booming economy with huge growth potential -- and almost none of the safeguards that protect corporate investments in the American marketplace.

"I think the analogy is to a poker game," said Alenka Grealish, a manager with Celent, a Boston-based banking consultancy. "You pay an entry price to have a chance at some unknown upside."

Bank of America Chairman Ken Lewis flew to China to sign the deal in a ceremony this morning -- still Thursday night in Charlotte -- with the Chinese bank's chairman, Guo Shuqing.

"This investment is aimed at creating long-term benefits by partnering with the best-positioned bank in China," Lewis said in a statement that ended months of speculation about the bank's interest in China.

Bank of America, the second-largest American bank with assets of $1.2 trillion, posted a profit of $14.1 billion in 2004. The China Construction Bank, one of four principal state-owned banks with assets of $470 billion, posted profits of $6.1 billion last year.

The Chinese bank is emerging from turbulence. Its chairman was convicted in 2003 of accepting bribes. Around the same time, it received a $22.5 billion government bailout to help it reduce bad loans.

Since then, the Construction Bank has issued its first shares to investors, hired an independent board of directors and otherwise tried to behave more like financial institutions in capitalist economies.

But in March the chairman's successor was forced to resign amid renewed bribery allegations.

In a conference call earlier this year, Lewis said he was looking for "progress on credibility of the numbers" in China.

Still, Bank of America has been moving steadily to expand its presence. It now has four branch offices in China after opening a second location last year in Shanghai -- its first consumer and commercial office.

And in April, Lewis visited the country at the invitation of the government and met with Chinese Vice Premier Huang Ju.

The attraction is obvious.

The Chinese market is huge, and some day it could be wealthy. The China Construction Bank has issued more than 130 million bank cards, according to its Web site. That is four times the total number of customers claimed by Bank of America, the largest consumer bank in America.

"With a growing middle class buying condos and homes, there will be a need for consumer loans as well as credit cards," said Gary Locke, a former Washington governor who now works in the China practice at the Seattle law firm of Davis Wright Tremaine.

The size of the investment is relatively small for Bank of America. The company acquired FleetBoston Financial Corp. last year for $47 billion. It also paid $1.4 billion for a credit card processing company in a little-noticed transaction.

And Bank of America checked the books of the Chinese bank carefully before finalizing its investment, said bank spokesman Bob Stickler.

"The Chinese are working very hard to bring their major banks into the international financial community," Stickler said. "We believe the bank is on the right track."

International expansion is critical for Bank of America because it controls about 10 percent of U.S. deposits. Under federal law, it can't cross that line as the result of an acquisition. The bank can only expand domestically by building new branches and chasing customers.

In 2003, in a similar investment, the Charlotte bank spent $1.6 billion to acquire a 24.9 percent stake in Mexico's Grupo Financiero Santander Serfin.

Now the company is following some of the world's largest banks into China. HSBC, an English bank with Chinese roots (the name is an acronym for Hong Kong & Shanghai Banking Corp.), last year spent $1.75 billion for 20 percent of China's fifth-biggest lender, Bank of Communications.

Citigroup, the world's biggest financial services company, in 2002 bought a 4.6 percent stake in China's ninth-largest bank, Shanghai Pudong Development Bank Co.

Bank of America has an option to increase its stake to 19.9 percent over the next 5 1/2 years. Foreign investors are not allowed to own more than 20 percent of a Chinese bank, and total foreign ownership cannot exceed 25 percent.

Construction Bank

The Construction Bank was created by the Chinese government in 1954 to manage funding for public works projects. It remained an arm of government until 1994, when its primary focus was shifted to the private sector as part of broader economic reforms.

It was the first Chinese bank to offer automobile loans, according to its annual report. The company also boasts that its "Happy Family" mortgage loans have put 5 million Chinese families into homes.

The bank employs more than 410,000 people at over 21,000 branches. By contrast, Bank of America has about 175,000 employees and about 5,800 branches -- but almost twice as many ATMs.

Binyamin Appelbaum: (704) 358-5170; bappelbaum@charlotteobserver.com
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