China Opens Bank Doors to Foreigners

US equity fund Newbridge Capital is to become the first foreign investor to buy a controlling stake in a state-run Chinese bank, it was announced yesterday as Beijing's policymakers opened the door a little wider for outsiders to enter one of the world's biggest but wobbliest financial sectors.

Newbridge will spend $150m (£85m) on shares in Shenzhen Bank, placing it ahead of HSBC and a host of other western institutions seeking to gain a foothold in China ahead of liberalising reforms the country must introduce before 2006 under its commitments to the World Trade Organisation.

The investment will give Newbridge an 18% stake in the bank, making it the largest shareholder and entitling it to a majority of seats on the 14-member board of directors. Under Chinese law, the ceiling for foreign investors is 20%.

In a sign of the peculiar operation of the market in this communist-capitalist economy, the shares were valued at less than half the listed price. Most foreign analysts believe Chinese institutions and financial regulators overestimate the value of bank stock and underplay the huge amount of non-performing loans on the books of all lenders. The government calculates bad debts at $250bn, but private estimates are as much as three times higher.

Such concerns - and limits on expansion plans - have not deterred foreign investors from seeking a share of the $1.3 trillion of savings held by Chinese institutions.

Yesterday, Morgan Stanley and Deutsche Bank became the first foreign firms to snap up delinquent assets by buying $171m of bad debts auctioned by China Construction Bank.

According to the Chinese bank's financial adviser, Ernst & Young, the assets, which included a 31-storey office block and a 42,300 sq metre commercial building, were sold at about a third of their face value.

Newbridge is reported to be in talks to buy a stake in Misheng Bank, China's only private lender. HSBC, which already holds an 8% stake in the Bank of Shanghai, is also pushing to expand its presence in China, where it is said to be in talks to acquire 20% of the Bank of Communications. If completed, the $1bn acquisition of shares in China's fifth-largest bank would be the biggest deal on the mainland by a foreign institution.

It is unlikely to be the last. With share flotations for the country's top banks planned over the next few years, the Chinese government says it welcomes more foreign capital.