BEIJING - Bank of America Corp's (BofA) sale of half its stake in China Construction Bank Corp (CCB) will have a "very limited" effect on China's banking industry, analysts said on Tuesday.

BofA, the largest US lender by assets, announced on Monday it had agreed to sell 13.1 billion Hong Kong-listed shares of CCB for $3.3 billion to raise capital to meet new international banking standards. CCB's H shares rose just 1.8 percent on Tuesday, indicating that investors believed the sale would have a limited effect, analysts said.

BofA is selling "to meet its own capital needs, and we think that the impact on CCB will be relatively small", said She Minhua, a banking analyst at Haitong Securities Co.

CCB said on Tuesday that BofA's move is "understandable". The banks will continue to expand their cooperation and will soon sign a five-year strategic agreement, the Chinese lender said in a statement on its website.

Industry analysts said that prospects for China's banking sector remain bright, despite growing concern about possible problem loans tied to local government financing platforms and the overheated real estate sector.

China's big four banks reported net profit of 339.3 billion yuan ($53 billion) in the first half, buoyed by wider net interest margins and fast-growing businesses that generate fee income.

Singapore's Temasek Holdings Pte Ltd recently raised its stake in Bank of China Ltd to 7.07 percent from 6.96 percent of the bank's Hong Kong-listed shares. The move indicated that the Singaporean state-owned investment company was still optimistic about the Chinese bank, analysts said.

Despite the strong first-half profit picture, investors remain concerned as banks are struggling to meet the increasingly tough capital requirements of the People's Bank of China as it seeks to soak up liquidity and rein in inflation.

The central bank further tightened liquidity by ordering lenders to include margin deposits in their required reserves. Economists estimate that the move could lock up about $100 billion in bank liquidity and exacerbate pressure on the banks' capital bases.

Charlene Chu, head of Fitch Ratings Inc's China Financial Institutions, said that there is "significant risk" in China's banking system and it may prompt the government to intervene to support the domestic lenders.

The economic recovery in China remains heavily dependent on loose credit provided by the country's major lenders, which is driving inflation and a property bubble and may lead to a rise in delinquent loans, Chu said.

China Daily

(China Daily 08/31/2011 page13)