BofA Gains Foothold in China

Bank of America Corp. said Thursday that it agreed to buy a 9% stake in one of China’s biggest banks for $2.5 billion, marking the largest single foreign investment in China’s giant but troubled financial sector.

The stake in China Construction Bank would give the second-largest U.S. bank a foothold in China’s booming economy and potentially lucrative market for consumer and business lending. By the end of 2006, foreign banks will be allowed to do business directly with Chinese households, under the terms of China’s ascension to the World Trade Organization.

China Construction Bank, one of the “big four” Chinese state-owned banks, plans to sell shares to the public this year. Bank of America would be able to boost its stake to almost 20% -- the maximum allowed for a foreign investment in a Chinese bank -- over the next five-and-a-half years. The Charlotte, N.C.-based institution also would have one seat on China Construction Bank’s board.

Still, analysts questioned whether Bank of America was getting enough in return for its huge investment. The bank, with three offices in China, said it wasn’t planning to open branches in China. Two other large foreign banks, HSBC Holdings and Citigroup Inc., have bought stakes in Chinese banks, but they have branches in the mainland and Citigroup has a joint credit card operation with Shanghai Pudong Development Bank.

The agreement between Bank of America and China Construction Bank is “a huge deal,” said Carl E. Walter, China chief operating officer at JPMorgan Chase Bank in Beijing. “BofA will get a lot of friendship from the central government.” But he added it was a lot of money for dividends and one board seat.

Bank of America would provide not only capital but technical and management support that could help China Construction Bank transform into a sophisticated institution competing with international rivals.

The big four Chinese banks, led by Bank of China, control about 80% of the nation’s financial activity, holding most of the nation’s $1.3 trillion in domestic deposits.

The government banks have long enjoyed dominance with little competition. Cozy relations with state-owned firms and reckless lending have created a banking crisis that, among other things, has made Beijing reluctant to adjust its currency policy despite pressure from Washington. In 2003, Beijing injected $45 billion to bolster the balance sheets of China Construction Bank and Bank of China, which also is looking to list its shares overseas.

Since then, the Chinese banks have been trying to clean up their books. China Construction Bank, with $472 billion in assets, has cut down its share of bad loans from 20% of total loans a few years ago to 3.9% at the end of last year, although some believe the latter figure understates the amount of bad loans. What’s more, China Construction Bank has fired tens of thousands of employees to prepare for a public offering.

“We have much to learn from our partner in serving customers and creating shareholder value,” Guo Shuqing, China Construction Bank’s chairman, said in a statement released by Bank of America.

Kenneth D. Lewis, the American bank’s chairman and chief executive, said he was impressed with China Construction Bank’s reforms in recent years. “They have built a leading franchise in China, and we see value in combining their local knowledge and distribution with our product expertise, technology and experience with size and scale.”

Financial analysts in China seemed surprised by China Construction Bank’s hook-up with Bank of America. But the Beijing Youth Daily reported recently that at last month’s Fortune Forum, an international conference held in Beijing, Citigroup’s chief executive met with China Construction Bank’s president about a partnership. Citigroup executives couldn’t be reached for comment.

China Construction Bank has 14,500 branches and a relationship with 92 of the top 100 enterprises in China, and has leading positions in credit cards and infrastructure lending.

But the bank also has been plagued by corruption and poor management of its vast operations. Earlier this year, China Construction Bank’s then-president, Zhang Enzhao, abruptly quit and was detained by authorities on suspicion of corruption.

His departure came shortly after a lawsuit filed in California alleged that Zhang was involved in a $1-million kickback scheme in exchange for awarding a Florida company contracts to provide millions of dollars of software to China Construction Bank.