A Chinese consortium was the biggest buyer of the China Construction Bank stake that Bank of America sold last month, according to several people familiar with the deal.
The State Administration of Foreign Exchange, which manages most of China’s $3,200 billion in foreign reserves, the National Social Security Fund, and Citic Securities bought the CCB shares.
Bank of America sold 13.1 billion shares in the Chinese lender – half of its 10 per cent holding – generating $8.3bn in cash for the troubled US bank, and increasing its tier one capital buffer by $3.5 billion.
The Chinese government’s involvement comes as domestic bank shares are under pressure due to big capital raising exercises. Beijing asked Bank of America to sell only half its holdings in CCB, China’s second-largest bank by market capitalisation, the people added.
A person close to BofA said selling more of the CCB stake “would have been largely incremental” in reinforcing the bank’s capital position “so it made sense to structure the sale the way we did”. He added that not all of the shares could be sold until next year “so selling the entire position was not an option”.
Chinese bank shares have fallen 11 per cent in the past month despite reporting impressive earnings because of fears of dilution from expected rights issues. According to Citigroup, Chinese banks have not had such low valuations since the global financial crisis hit.
In August, CCB reported first-half pre-tax profits of CNY93 billion ($14.6 billion), a 31 per cent rise over the same period last year, but the lender’s share price has fallen 30 per cent from its highs earlier this year.
The Chinese involvement was kept closely under wraps.
Safe, which operates with great secrecy, used Hopu Capital, the Beijing investment firm established by Fang Fenglei, to mask its participation.
China’s National Social Security Fund, which was established in 2000 to cover unfunded government pension liabilities, had $114 billion under investment at the end of 2009, according to the Pacific Pension Institute. It has made a compound annualised return of 9.75 per cent since inception.
The Chinese buyers joined with the sovereign investment arms of Singapore and Qatar to buy the CCB stake. Temasek, the Singapore state investment agency, raised its holding in CCB to about 7 per cent. In early July, Temasek sold over $1bn of CCB shares through Morgan Stanley at a price that was much higher than the level at which it bought shares last week.
Temasek’s CCB deal and a separate agreement to purchase a block of shares in Bank of China has prompted criticisms in China that the Singapore sovereign wealth fund was acting like a hedge fund by investing shortly after selling part of its stake in each of the two Chinese banks in early July.
Temasek declined to comment. However, the series of deals is in line with the fund’s guiding charter, which says it is “an active value-orientated investor that may increase, reduce or hold its investments in companies or other assets”.
Aside from Singapore and Qatar, other sovereign funds, including some that were burnt by investments in big global financial institutions in 2007 and 2008 did not participate in the CCB sale.
No large international private equity firms were involved in the deal, although TPG, among others, has close relations with Safe.
“Our investors would kill us if we took a $500 million piece of CCB, and got a stake of less than 1 per cent,” said the Asia head of one big buy-out firm. International hedge funds were also excluded from the deal, since China prefers to sees the shares of its icons in the hands of long term, friendly holders.
Citic Securities declined to comment.
Additional reporting by Kevin Brown in Singapore