Bank of Communications (BoCom), China's fourth largest lender by market value, is likely to raise up to 30 billion yuan through a rights offering in Hong Kong and Shanghai to replenish its capital base, people with knowledge of the matter said yesterday.

The Shanghai-based lender may offer 1.5 new shares priced between 3 and 4 yuan apiece for every existing 10 shares, the source said. That would take the total funds raised by the bank to around 25 to 30 billion yuan.

The source also indicated that the rights issue price would be at least 50 percent lower than the bank's closing share price of 8.14 yuan in Shanghai yesterday.

Board meeting

The bank will hold a board meeting today to discuss the fund raising plan, but the timetable for the rights offering has still not been finalized, the source said.

The Ministry of Finance, the largest shareholder in BoCom, had earlier indicated that it would inject capital into the bank by buying new shares. London-based HSBC, which has an 18.6 percent stake in BoCom, would also need to spend several billion yuan to maintain its position as the third largest shareholder.

Most Chinese lenders are suffering from capital shortfalls due to last year's record credit expansion. Chinese banks extended some 9.6 trillion yuan in new loans last year, doubling the total amount that they gave out in 2008.

With regulators deciding to adopt a hawkish stance and the authorities stressing the need for a slowdown in credit growth, lenders are rushing to raise funds to bolster their stretched balance sheets.

The central bank hiked the bank deposit reserve ratio twice this year in an effort to contain banks' lending capacity and prevent the economy from overheating. The regulators have, however, not increased interest rates as this could slow down growth.

Meanwhile, the country's banking regulator issued two directives on Saturday asking banks to lend more prudently and also check whether the loans are used for their intended purposes.

BoCom's core capital adequacy ratio, a key indicator of financial strength, dropped to 8.08 percent by the end of September last year, one of the lowest among the country's top listed banks.

"The funds raised would help lift the bank's core capital adequacy ratio by 2 percent and meet its business expansion in the next two to three years," said Chen Xi, a Shenzhen-based banking analyst at First Capital Securities.

A rights issue is seen as a better option than bonds for BoCom, as it could effectively replenish the lender's tier one capital, Chen said, but warned that the new share sales could have a negative impact on the market.

The market has been closely watching banks' massive fund raising plans since late last year, as investors are concerned that hefty offerings could upset the stock market. Bank of China announced in January plans to issue up to 40 billion yuan of convertible bonds to bolster its capital base.