Bank of America hits the wall in China

20 Dec 2008

1

Bank of America hit the wall in China this week, when its plan of selling about $3 billion worth of shares in China Construction Bank was shelved following objections to the sale by the Chinese authorities, citing its securities law, which would have forced the American banker to forfeit its profit from the sale.

Bank of America holds a 19.13-per cent stake in CCB and had hired UBS last month to offload about 5.5 billion shares out of the 44.7 billion shares that it holds.

Chief executive Ken Lewis shelved the plan after talking with his counterpart Guo Shuqing of CCB although the Chinese bank issued a statement saying that it had had not come in the way of the sale.

Under China's securities law, any shareholder holding more than 5 per cent of a publicly traded Chinese company is barred from selling its shares for six months from the date of their purchase. Shareholder's who fail to adhere to this law, can forfeit their profits.

Bank of Ameica had first purchased 8.2 per cent shares of CCB for $3 billion during the bank's maiden IPO in June 2005. In June 2008 it exercised part of its option by increasing its stake to 10.75 per cent by purchasing 6 billion more shares for approximately $HK2.42 amounting to $1.86 billion under a formula in the agreement. Under the stock purchase agreement the US banker could increase its stake to just below 20 per cent. (See: Bank of America to exercise portion of China Construction Bank option)

Despite a sharp slide in Chinese share prices this year, Bank of America's approximately $4.9 billion total investment in CCB had almost tripled in value and was worth $14.5 billion as of 30 September.

In November, Bank of America said it would boost its three- year-old holding by spending $7 billion to raise its stake in CCB to 19.13 per cent from 10.75 per cent. (See: Bank of America to nearly double China Construction Bank stake)

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

Market had speculated last month 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)

Along with BofA, there are other banks whose lock in period of their investments in China will expire and could trigger a wave of sellings next year to boost their liquidity and test Beijing resolve to intervene although many foreign companies now realize that they cannot sell their stakes in Chinese companies at their discretion, but that of Beijing.

China had in the past acted against companies who had sold its stake prior to the expiry of the lock-in period, when a Scottish money manager, Martin Currie Investment Management, burnt its fingers when it sold part of its 5.9 per cent stake five months after it had acquired it in Nanning Sugar Manufacturing Co.

The company had its local bank deposit frozen by a Chinese court and the case is still continuing.

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