Western banks sell China stakes at own risk

HONG KONG (Reuters) - Western banks tempted to convert big paper profits on investments in Chinese lenders into cash to shore up subprime-battered balance sheets would do so at the expense of hard-earned access to the fast-growing country.

Bank of America (BAC.N) has said it was looking to shed some of its stake in China Construction Bank (0939.HK), while Singapore state investment agency Temasek TEM.UL late last year sold a small part of its holdings in the same lender as well as Bank of China (3988.HK) for a combined US$792 million.

Market watchers said that while strategic investors might take profits, an exodus by the likes of Citigroup (C.N), Royal Bank of Scotland (RBS.L), HSBC (HSBA.L)(0005.HK) and UBS (UBSN.VX)(UBS.N) was unlikely -- even as prospects for gains cool after earlier rallies made China's banks among the world's most valuable.

Lockup commitments, typically of three years, begin to lapse later this year.

"You probably will get some more incidences of profit-taking amongst the strategic investors, but for the most part I think, given there are limited opportunities on the table, they're not going to be giving it up anytime soon," said Warren Blight, an analyst at Fox, Pitt-Kelton.

Bank of America paid $3 billion in August 2005 for a stake in China Construction Bank as part of the mainland lender's IPO -- which was the first by one of China's "Big Four" banks. That stake, now worth about $13 billion, must be held until October.

Late last year, Bank of America Chief Executive Ken Lewis said the No. 2 U.S. lender hoped to sell some of its Construction Bank stake starting in 2008 and was "talking to the Chinese to see what level they would be comfortable with us holding".

Lewis also predicted "quite disappointing" fourth quarter results, which the bank is scheduled to release later on Tuesday.

THE WOES OF SOLITUDE

While foreign banks are permitted to set up shop in China, going it alone is expensive, time-consuming and complicated, making the partnerships cemented through holdings in Chinese lenders valuable beyond stock gains.

Bank of America, for one, agreed with Construction Bank not to buy into another Chinese retail bank or begin new retail banking operations in the country.

"They may take some profit but I would very much doubt that they will sell out of their whole position and abandon their relationship because it's just too important for their future in China and in Asia to just let that go," Blight said.

Amid the talk of selling, other investors, such as HSBC and, reportedly, Citigroup, have looked to lift their stakes in Chinese partners.

HSBC, whose 19.9 percent stake in Bank of Communications (3328.HK) was diluted by the No. 5 Chinese lender's domestic IPO, has bought shares to get back above 19 percent but is still not back to its earlier holding level. London-based HSBC has an agreement to lift that to 40 percent once regulations allow.

Citigroup, which led a consortium that paid $3.1 billion for control of Guangdong Development Bank, has been in talks to raise its stake of less than 4 percent in another lender, Shanghai Pudong Development Bank (600000.SS), mainland media said.

A spokesman for Citigroup, which last week booked a record quarterly loss of $9.83 billion, declined to comment.

SUBPRIME CASUALTIES

The ranks of Western banks with big stakes in Chinese lenders reads like a "who's who" of subprime casualties. Besides Citigroup, Bank of America and HSBC, the list includes Royal Bank of Scotland and UBS, which each own big chunks of Bank of China. The five have booked more than $41 billion in writedowns and charges since the subprime crisis emerged last year.

CLSA analyst Dominic Chan said he expected foreign institutions would sell their China bank stakes only to the extent that it helps ease losses related to the subprime crisis.

"I don't expect a massive selldown for these foreign banks," he said. "I think they would remain long-term investors in China."

That view was echoed by several banking industry sources.

Another factor the Western banks must consider: Mainland lenders including Bank of China, Construction Bank, and Industrial and Commercial Bank of China (1398.HK), in which Goldman Sachs (GS.N) is a big investor, have seen their shares bludgeoned in the recent global markets selloff, eroding earlier gains.

Nicole Yuen, head of China equities at UBS, said Western institutions face the conflicting forces of whether to sell holdings in China in order to raise money, or step up investment in China and other emerging markets to compensate for disappointing returns elsewhere.

"Right now, it is hard to judge which force will win as it is still too early to see how big an impact the credit crisis will have on the U.S. economy and markets," she said, declining to comment on any specific company.

(Additional reporting by Steve Slater in London and George Chen in Shanghai; Editing by Jean Yoon)