China toughens stance on banks' M&A abroad: source

SHANGHAI Thu Feb 26, 2009 6:37am EST

SHANGHAI (Reuters) - China's banking regulator has told the country's five biggest lenders, including Industrial & Commercial Bank of China (1398.HK) (601398.SS), that it will step up regulation of overseas acquisitions and investments as it confronts the global financial crisis, a source familiar with the situation said.

The China Banking Regulatory Commission also told the lenders it would examine the quality of new loans and boost its monitoring of the quality of existing loans, while calling on them to prepare for the possible exit of foreign strategic investors as share lock-up periods expire, the source said.

China's five biggest lenders, which also include Bank of China (3988.HK) (601998.SS), China Construction Bank (0939.HK) (601939.SS), Bank of Communications (601328.SS)(3328.HK) and Agricultural Bank of China, have avoided the severe financial difficulties that hit western rivals such as Citigroup (C.N) and Royal Bank of Scotland (RBS.L).

The commission's chairman, Liu Mingkang, said on Thursday that China's banks were in good condition to ride out the crisis.

But worries have mounted that risky overseas investments could undermine their financial health, while government pressure to boost lending and bolster the slowing domestic economy could lead to a rise in non-performing loans.

"The current economic and financial crisis is having a huge impact on the global economy, while massive potential risks have built up," the source quoted the regulator as saying.

POTENTIAL RISKS

To cope with potential risks, the regulator urged the five lenders to set aside adequate provisions for bad loans and to closely monitor the business of their insurance and fund management units.

The watchdog will also step up checks on the banks' consumer and real estate lending, the source said.

Some Chinese banks have already shown wariness over acquisitions abroad.

China Construction Bank Chairman Guo Shuqing said this month that the second-biggest Chinese lender had no immediate interest in buying overseas banks due to uncertainty about their asset quality.

Concerns have also risen that foreign institutions, beset by financial troubles, will sell off strategic stakes in their Chinese partners to recoup billions of dollars of investment as three-year lock-up periods lapse.

Royal Bank of Scotland and UBS (UBSN.VX) have already sold off their stakes in Bank of China, while Bank of America (BAC.N) has lightened its holding in China Construction Bank.

Major Chinese banks should keep a close eye on strategic investors' moves, seriously study future arrangements with them and be ready to take action in a rational manner, the regulator said.

Strategic stakes held in ICBC by Goldman Sachs (GS.N), Allianz Group (ALVG.DE) and American Express (AXP.N) will emerge from a lock-up period this year.

(Reporting by Shanghai Newsroom; Editing by Edmund Klamann)

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