Bank of America is to raise its stake in China Construction Bank to 19.1% from the 10.75% it now owns by exercising an option to buy the shares from Central Huijin, a state investment agency. China Construction is China’s third largest bank, and a likely beneficiary of Beijing’s proposed 4 trillion yuan stimulus package. BofA’s announcement ends speculation that it would sell its existing stake to bolster its own capital base given the global financial crisis.
It’s latest tranche of shares in China Construction will cost it $7 billion, as per the terms of its option. This Bystander estimates its market value at $10 billion. BofA bought its initial 9% stake in June 2005 for $3 billion and toped it up to 10.75% for a further $1.9 billion. That combined 10.75% stake, BofA says, was worth $14.5 billion at September 30, even though China Construction’s shares have fallen by about half from their peak in October last year.
BofA, which is also buying Wall Street firm Merrill Lynch and earlier this year completed its acquisition of mortgage company Countrywide, has raised $22 billion of new capital this year and is getting $25 billion from the U.S. government’s $700 billion financial bailout package, $10 billion of which has already arrived. BofA says none of that money is being used to finance the China Construction stake. It would certainly raise some eyebrows in the U.S. if it were, though, equally how would you tell?