Jan. 6 (Bloomberg) -- China spent $45 billion bailing out Bank of China and China Construction Bank, using 11 percent of its foreign-exchange reserves to help its second- and third- largest lenders cut bad loans before initial public share sales.

The money was split equally between the banks and allocated at the end of last year, said Liao Weidong, a spokesman for Bank of China in Beijing. China made use of its record $403 billion of foreign-exchange reserves, which jumped 41 percent last year.

China's top four biggest state-owned banks are trying to reduce $400 billion of bad loans, caused by poor management and five decades of government-directed lending to unprofitable companies. China Construction Bank is set to hire investment banks to raise as much as $5 billion this year and Bank of China targets a sale in 2005.

``I'm excited about China banks coming to the market,'' said Simon Koh, who helps manage $600 million at Commerzbank Asset Management Asia Ltd. in Singapore, including Asian bank stocks. ``China's a booming economy and we want some exposure to the financial sector.''

Demand for Chinese IPOs surged last year after the economy grew 9.1 percent in the third quarter from a year earlier. In December, investors ordered more than $80 billion of China Life Insurance Co.'s stock as the nation's biggest insurer raised $3.47 billion overseas in its initial public offer.

Share Sales

The top four banks have bad loans estimated at more than a fifth of their total lending and the former head of both Bank of China and Construction Bank was convicted last month of loan fraud. Standard & Poor's estimate the bad loans at 45 percent of total lending, more than double the government's official figures.

Wang Xuebing, was fired in 2002 from his job as head of Construction Bank after a probe into loans made between 1994 and 2000, when he was president of Bank of China. China's ruling Communist Party stripped Wang of his party post and sentenced him to 12 years in prison for taking bribes, state-run Xinhua news service reported on Dec. 10.

Bank of China, the country's oldest lender, has said it wants to cut its bad-loan ratio below 10 percent from 17.98 percent at the end of October, to make it more attractive to investors and to compete with overseas competitors, including Citigroup Inc., which can enter China without restrictions at the end of 2005.

Liu Mingkang, chairman of the China Banking Regulatory Commission, in December outlined a three-part plan involving two of the nation's top banks -- then unidentified -- in a project to help them cut bad loans, boost capital and sell shares overseas. Liu previously headed Bank of China.

New Loves

``They will become the market's new loves when they get listed,'' said Zhao Feng, who helps manage the equivalent of $242 million at Tongqian Fund in Shenzhen, 3 percent of which is invested in bank shares. ``For banks, scale matters: The bigger, the better.''

China Construction, which may become the first of the big four to sell shares, has the best asset quality of the four biggest banks. It cut bad loans by 19.6 billion yuan in the first half of 2003 to 12.9 percent of total lending and said also wants to reduce the ratio to 10 percent by year's end.

The bailout ``is exciting news for us,'' said Yu Baoyue, a spokesman at China Construction Bank in a telephone interview.

China in 1998 spent 270 billion yuan to bolster capital at its four biggest lenders, including Industrial & Commercial Bank of China and Agricultural Bank of China. A year later, it formed four asset-management companies to acquire more than 1.4 trillion yuan of bad assets from the banks.

Bad Loans

``We got $22.5 billion,'' said Liao Weidong, a spokesman for Bank of China in Beijing. ``The capital was allocated to us before the end of last year.''

Bank of China said it had loans and overdrafts of 1.74 trillion yuan ($210.3 billion) at the end of 2002. The bank's bad loan ratio stood at 22.49 percent or 409 billion yuan at the end of last year. The Beijing-based lender in 1999 transferred 352 billion yuan of bad loans to China Orient Asset Management, one of four companies set up by the government to dispose of banks' bad assets, and has disposed of 63.7 billion yuan of those.

``It's a sizeable amount,'' said Arthur Lau, a banking analyst at Fitch Ratings, which rates Bank of China's foreign currency debt BBB+, its third-lowest investment grade. ``Their balance sheets will be cleaner, making it easier for potential equity investors to understand the situation.''

Capital

Bank of China had a capital-adequacy ratio of 8.15 percent at the end of 2002. China Construction Bank's capital adequacy ratio was 6.91 percent at the end of 2002, below the Bank of International Settlement's recommended global standard of 8 percent.

China has a BBB+ sovereign rating, Standard & Poor's third lowest investment grade, with a positive outlook.

``Someone has to foot the bill at the end of the day,'' said Chew Ting, director of sovereign ratings group at Standard & Poor's in Singapore. ``Our ratings on China incorporate the cost to the government of bailing out the banks.''

Last Updated: January 5, 2004 23:12 EST