Bank of China, the country's largest foreign exchange bank, said yesterday it has sold 14.07 billion yuan (US$1.7 billion) worth of subordinated bonds on the inter-bank bond market.

The 10-year bonds carry an annual coupon of 4.87 percent set after a public tender, bank spokesman Wang Zhaowen said.

The bank said earlier it aimed to sell 10 billion yuan (US$1.2 billion) in such bonds to replenish its capital base. The bonds rank after other bank liabilities in terms of claims on bank assets.

"Due to strong demand, we sold an additional 4.07 billion yuan (US$490.3 million) of bonds," Wang said.

According to yesterday's China Securities Journal, China Construction Bank was the largest single buyer of the issuance. The bank bought 3.7 billion yuan (US$445 million) worth of the bonds.

China Life Insurance bought 2.5 billion yuan (US$301 million) worth of bonds, and Bank of Communications bought 1.8 billion yuan (US$216 million), it said.

The offering is just part of up to 60 billion yuan (US$7.2 billion) the bank plans to raise before the planned initial public offering.

China Construction Bank, which also has a plan to become listed, said it would issue up to 40 billion yuan (US$4.8 billion) in subordinated debt from the middle of this month and finish the issuance before the end of the first half of next year.

Dong Chen, a senior analyst with China Securities, said Chinese commercial banks, especially the State-owned banks, need to issue such bonds because they will have to sharpen their competitive edge before foreign banks can enter the Chinese market without restrictions by the end of 2006.

The banks need to lower the rate of non-performing loans, rid themselves of old financial burdens and raise their capital adequacy to international standards, he said.

Wang said Bank of China also has a plan to invite company investors to take a stake in its initial public offering.

"We will choose the strategic investors this month or next," he said.

The strategic investors should be able to bring in advanced management experience and improve the bank's corporate governance, he said.

Bank of China and China Construction Bank, which won a US$45 billion bail-out from the government in late December, were chosen by the central government for a pilot project to turn them into joint stock banks.

"Work on Bank of China's share-holding reform goes smoothly so far this year," Wang said.

The focus of the restructuring is to make the bank's service more market-oriented and customer-centred, he said.

But the bank has not yet made a decision on where it would seek listing.

Bank of China's first quarter operating profit reached 17.4 billion yuan (US$2.1 billion), earlier figures indicate.

The profit represented an increase of 3.8 billion yuan (US$457 million) or 28 percent compared with the same period of last year.

Last year, the bank earned 57 billion yuan (US$6.9 billion) in operating profit before setting aside provisions for bad assets.

The profit represented an increase of 4.8 billion yuan (US$573.4 million) or 9.11 percent compared with 2002.

By the end of March, the bank's outstanding amount of non-performing credit stood at 342.4 billion yuan (US$41.3 billion), a drop of 9.4 billion yuan (US$1.1 billion) from the end of last year.

By then, the bank's non-performing credit ratio was 14.84 percent, a drop of 1.44 percentage points.

(China Daily July 9, 2004)