Bank of America Corp said it will exercise its option and increase stake in China Construction Bank, China's second biggest bank – from 10.75 per cent to 19.1 per cent - in a deal worth about $7 billion, even as it cuts jobs and digs into the government's bailout kitty.

Bank of America said it will boost its three- year-old holding in China's No 2 lender to 19.13 per cent from 10.8 per cent by buying shares from the government

Bank of America had bought 8.2 per cent stake in China Construction Bank for $3 billion in June 2005 and, in May 2008, the bank said it would exercise part of the option to purchase further common shares in the Chinese bank from 8.2 per cent to 10.75 per cent at $1.86 billion. (See: Bank of America to exercise portion of China Construction Bank option)

Once it raises its stake to 19.1 per cent, Bank of America will hold around 44.7 billion shares in China Construction Bank.

SAFE Investment Ltd (Huijin), the Chinese government body that controls China Construction Bank, will still hold a majority stake of 57.03 per cent, directly and indirectly through its wholly owned subsidiary - China Jianyin Investment Limited.

Bank of America would be able to purchase the stock of CCB at a huge discount as the Chinese bank had lost its value by 45 per cent in the past six months and the American bank is paying 32 per cent less than yesterday's closing price.

Despite the news of Bank of America increasing its stake, shares of CCB tumbled in the Hong Kong and Shanghai stock markets as investors expected Bank of America to instead offload its 8.2 per cent stake it had bought in 2005 as the lockup period for that stake expired last month.

The new stock acquired from China Construction Bank is in a lockup period until 29 August 2011 and Bank of America has said that it will not use the government bailout money of $15 billion it received to fund this additional stake.

Market speculated that Bank of America might sell some of its investments in order to boost its own capital, as the bank has taken a beating on the housing mortgages, and amassed huge losses in its credit card division and on its $50 billion investment in September when it acquired Merrill Lynch in an all-stock deal. (See: Bank of America buys Merrill Lynch)

In October, Bank of America, which earlier bought Countrywide, had agreed to a deal worth as much as $8.6 billion with attorneys representing customers of Countrywide to offer more affordable and sustainable mortgage payments for borrowers who had financed their homes with subprime loans or adjustable-rate mortgages. (See: Bank of America agrees to $8.6 billion deal on Countrywide loans) 

To raise capital, Bank of America had also sold about $10 billion of common stock and pruned its quarterly dividend and availed of $15 billion from the government bailout fund.

Bank of America's total investment of $4.86 billion has nearly tripled in value and is worth around $14.5 billion as of 30 September.

Since its first investment in CCB, Bank of America and CCB have jointly been involved in nearly twenty partnership projects, which include a leasing company in Beijing and withdrawals from Bank of America's ATM machines in China at no fee to its customers.

For Bank of America Corp, the biggest US bank by market value, this will be the second post-crisis acquisition after its purchase of Merrill Lynch & Co.