China banks learn to say no to risky deals-sources

(Repeats to widen distribution)

By George Chen

NEW YORK, March 26 (Reuters) - Chinese banks, widely considered as possible buyers of more U.S. financial assets amid the snowballing credit crisis, are becoming picky and cautious due to increasing concerns about investment risks.

After China's state-controlled CITIC Securities (600030.SS) narrowly avoided taking a bath on a proposed investment in the ailing Bear Stearns Cos Inc BSC.N, the Chinese government is insisting that any major foreign investment by state entities gets approval from the cabinet before a final deal can be reached, according to sources with direct knowledge of the situation.

Even before that, there had been increased nervousness about doing bank deals.

China Construction Bank (CCB) (601939.SS), one of the country's Big Four banks, has turned down nearly 30 proposals of possible acquisitions over the past year, including opportunities to buy stakes in troubled U.S. home mortgage lender Countrywide Financial Corp CFC.N and British bank Northern Rock (NRKx.L), the sources said.

CCB, China's top real estate lender, was invited by Goldman Sachs Group Inc (GS.N) late last year to join bids for Countrywide, the biggest U.S. home loan issuer, said the sources, who declined to be identified because they weren't authorized to speak on the record.

CCB turned down Goldman Sachs' proposal after the Chinese bank decided that an equity investment in Countrywide would be too risky for the Chinese bank to bear.

"It's always a question about how to balance your risk and chance," said one of the sources with knowledge of the Countrywide proposal that was presented to CCB. "If risks are bigger than the chance to make money, why should we go for it?" he said.

Countrywide, based in Calabasas, California, lost $703.5 million last year, its first annual loss in more than 30 years, amid the credit crisis, and its share price sank. It eventually agreed in January to be acquired by Bank of America Corp (BAC.N) for about $4 billion in a deal advised by Goldman Sachs.

Like CCB, senior executives at other major Chinese banks said they receive such "invitations" from global investment banks "on a weekly basis". However, their interest in U.S. financial assets has waned because they are concerned the crisis may still have a way to go and the shares could go significantly lower.

NORTHERN ROCK

The big Chinese banks, once in deep financial trouble but stronger now after government bailouts a few years ago, have become popular destinations for investment bankers shopping assets. This is because they are seen having both the desire to grow globally and the means, given big share price gains and China's nearly $2 trillion in foreign exchange assets.

Early this year, CCB also received an invitation from British billionaire Richard Branson's Virgin Group, which suggested CCB should join its bid to acquire the troubled British bank Northern Rock Plc, according to the sources.

Virgin Group's senior representatives flew to Beijing to enter formal negotiations with CCB as they wanted to finalise a plan to jointly invest in Northern Rock. However, the idea was eventually vetoed by CCB's board members who believed the risks of such an investment were too high, the sources said.

"The risks are either exchange rate risks, interest rate risks or integration risks. And of course some countries where the acquisition targets are located were not friendly and did not want to provide any support to us," CCB chairman Guo Shuqing told an official Chinese newspaper last week. He didn't specifically name any possible overseas deal.