Bank of China invests $1 billion in railway project

Railways are a safe bet and sources say all of China's major banks are competing to get involved.

Bank of China (BOC), the country's third-largest lender by market value, said over the weekend that it plans to invest $1 billion in a railway project as it looks to share a slice of the country's infrastructure expansion.

The Beijing-based bank was identified by analysts as one of the most aggressive lenders in 2009 when it provided a total of Rmb1 trillion ($146 billion) worth of loans during the year, and it is showing no signs of slowing down its credit growth so far this year.

The announcement of this latest investment comes only a month after BOC said it would invest $878 million in a state-run firm that is building the high-speed railway connecting Beijing and Shanghai, and has fuelled speculation that the bank may need to limit loans for transportation projects during the rest of 2010 as it has already used up much of its quota for this sector.

BOC said in a statement to the Shanghai stock exchange that its wholly owned subsidiary, Bank of China Group Investment, will pay Rmb7.5 billion for a 14.5% stake in a railway operator. The transaction will be settled in foreign currencies and in instalments over a two-year period.

The railway operator, which is to be established with Rmb51.9 billion in registered capital, will build a 1,260 kilometre west-to-east railway traversing the Shanxi, Henan and Shandong provinces. The project, to be constructed over the next four years with a total investment of Rmb99.8 billion, will be used mainly for coal transportation in the region, BOC said in the statement that was released on May 8. The plan is subject to regulatory approval.

"The investment is expected to generate reasonable return and will help the bank diversify its services," BOC said. "It will also help the bank win more business in China's large-scale railway investment and construction, which is in line with our development strategy," it said.

BOC has been eyeing railway project investments in China since 2003. China's railway network is a very safe bet and all the country's major banks are competing to get involved, sources familiar with the situation said.

BOC appears to be a weaker candidate in terms of renminbi businesses compared with bigger domestic competitors such as Industrial and Commercial Bank of China and China Construction Bank, but projects that involve foreign currency lending favour BOC for its experience in this market segment, one source said.

BOC said early last month that it had agreed to buy a 4.54% stake in Beijing-Shanghai High-Speed Railway Co, the operator of the 1,318 kilometre express rail link between China's two most affluent cities. The operator was founded in January 2008, with a registered capital of Rmb115 billion, to construct the railway, which involves a Rmb220.9 billion investment.

Analysts say the latest investment adds very little pressure to the lender's capital adequacy ratio. "It won't have any impact on the bank's financial strength given its fairly low loan-to-deposit ratio of 64%," said Ming Tan, a banking analyst at Yuanta Securities.

BOC has a core capital adequacy ratio (CAR) of 9% and a total CAR of 11%, according to Nomura.

China's Rmb 4 trillion ($586 billion) stimulus package that was announced in November 2008 and focused on infrastructure construction, increased railway investments by 67% last year, statistics show. Beijing is expected to continue developing the nation's railway system.

Net new bank lending in China slowed in March to Rmb510.7 billion, well below forecasts of a Rmb750 billion rise and February's total of Rmb 700.1 billion, according to the People's Bank of China (PBOC).

The PBOC has repeatedly stressed its intention to enforce a lower loan quota of Rmb7.5 trillion in 2010, down from a record Rmb9.6 trillion last year. Even so, all major Chinese banks are expected to raise funds to replenish their capital reserves.

BOC said in January that it plans to sell up to Rmb40 billion worth of bonds convertible into Shanghai-tradedA shares to shore up its capital base.

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