The Royal Bank of Scotland (RBOS) is "almost certain" to become a strategic investor in the Bank of China (BOC), a bellwether leading China's banking reform, the Economic Information Daily reported on Monday.

The Xinhua-run newspaper quoted unidentified BOC sources as saying that the two have not made an official announcement because differences remain on "concrete prices."

China is overhauling its state banks, including the BOC, ahead of the World Trade Organization-mandated opening of the country's financial market to more sophisticated overseas rivals by the end of 2006.

Financial regulators have requested that domestic banks join hands with foreign institutions to initiate shareholding reform and stock market debuts, citing that cooperation with overseas firms are expected to bring about the state-of-the-art management that domestic banks badly need.

The BOC hopes to ride on RBOS's retail business advantages, the paper said.

As the second biggest bank in Europe, RBOS has an extensive network of outlets serving individual clients and typically does well in the housing and auto lending businesses. Its expertise would be a big boost to BOC, which hopes to raise the proportion of its retail business to 50 percent from the present one-third.

BOC's core competitiveness lies in its foreign exchange business serving more than 50 percent of domestic foreign-funded enterprise borrowers. Retail business, however, has long been its "soft rib."

Zhu Min, a BOC assistant president responsible for restructuring and listing, said the bank's strategic investor should be "complementary in business, with no direct competition with the BOC."

"The investor should be an international financial consortium that boasts a sharpened competitive edge in a certain area -- which is exactly the course of BOC's development trend," Zhu said.

The Economic Information Daily reported that Swiss bank, UBS, Singapore-based Temasek Holdings, and an investment bureau under Kuwait's ministry of finance are also talking with BOC about possible stakes.
But they cannot be called "strategic investors" even if they succeed in buying into BOC -- after all, their stakes might be much smaller than that of RBOS.

Under Chinese law, foreign investors may own up to 25 percent of a Chinese bank, but any single investor may not hold more than 20 percent.

UBS said in June that it planned to invest approximately US$500 million in BOC, but the paper revealed that it might increase its investment to US$1.266 billion for a 5 percent stake.

The investment hike will be a helping hand for UBS to obtain the underwriting rights for BOC's initial public offering, the paper said.

Temasek said earlier it would invest US$1 billion in China Construction Bank (CCB), another of China's "Big Four," which also include the Industrial and Commercial Bank of China and Agricultural Bank of China. CCB is also scheduled to go public.

(Xinhua News Agency August 9, 2005)