Swiss-based bank UBS said yesterday it is in talks with Bank of China (BOC) with a view to buying a stake in the country's largest foreign exchange lender.

UBS said in a statement that it is considering forming a mutually beneficial partnership.

Such a partnership would include commercial co-operation in certain areas of investment banking, which are yet to be agreed, and the possibility that UBS could invest US$500 million in BOC.

UBS, which helped BOC list its Hong Kong arm in 2001, is searching for an opportunity to form a securities joint venture on the mainland.

It has already won regulatory approval to buy 49 percent of Shenzhen-based China Dragon Fund Management Co, and has also got the go-ahead to start a financial derivatives business in China.

Meanwhile, it has permission to invest as much as US$800 million in yuan-denominated shares and bonds -- the biggest quota among participants in China's Qualified Foreign Institutional Investor programme.

BOC Spokesman Wang Zhaowen confirmed yesterday that his bank is holding talks about a stake sale before IPO early next year with a number of investors, including UBS.

Last Friday, Bank of America agreed to invest US$3 billion for a 9 percent stake in China Construction Bank, which plans to list in Hong Kong before the end of this year.

Chinese banks have their eye on strategic foreign investors as part of ongoing shareholding reforms. They believe these investors can offer global expertise and much-needed capital.

Wang agreed that strategic investors can help increase a Chinese bank's capital strength, optimize its capital structure, and diversify ownership.

BOC, which received a US$22.5 billion capital injection from the State in late 2003, was picked by the government to spearhead the country's banking reform strategy.

Last August, it restructured itself into the joint-stock company Bank of China Limited.

Wang said his bank is now into the second step of reform, which focuses on improving corporate governance.

He added the bank will finalize preparations for the IPO before the end of this year.

In May, the bank reported that its operating profit in 2004 rose by 21.3 percent to 57.8 billion yuan (US$7 billion) from the year before.

(China Daily June 24, 2005)