China Construction Bank, one of the country's four largest state-owned commercial banks, said Wednesday it would set up a joint stock company next week to prepare for an initial public offering.

The bank, which won a US$22.5 billion bail-out from the State in late December, was chosen by the central government as a pilot bank for the country's banking reform.

The bank was approved by the government in June to split into the China Construction Bank Group and the China Construction Bank Corporation - a joint stock listing vehicle three months later.

The joint stock company will continue to operate the bank's commercial banking business including its domestic and foreign currency deposits, loans, banking cards and clearance.

Business names, trademarks, Internet domain names and service call numbers of the China Construction Bank and its branches will remain unchanged and will continue to be used by the company.

The joint stock firm, with a registered capital of 194.23 billion yuan (US$23.4 billion), has five founding shareholders.

The largest shareholder is the Central Huijin Investment Co, which controls an 85.228 percent stake in the joint stock firm.

Baosteel Iron and Steel Co Ltd, China's top steel maker, and electricity giant State Grid Corp each hold a 1.545 percent stake.

Yangtze Power, which operates the Three Gorges project, has a 1.030 percent stake.

The remainder goes to China Construction Bank Investment Co Ltd, which is wholly owned by the Central Huijin Investment Co.

The joint stock company also has plans to usher in foreign company investors as its equity owners, aiming to increase its capital strength, optimize capital structure and diversify ownership.

China Construction Bank President Zhang Enzhao said earlier that his bank's goal was to establish a modern share-holding commercial bank that will make it a competitive heavyweight in the global financial market.

Dong Chen, a senior analyst with China Securities, said Chinese commercial banks would have to sharpen their competitive edge before foreign banks enter the Chinese market without restrictions before the end of 2006.

"They will have to lower the rate of non-performing loans, get rid of historical financial burdens and raise their capital adequacy to international standards," he said.

The country's commercial bank law stipulates that commercial banks' capital adequacy ratio will have to reach 8 per cent, the minimum required by the Basel Capital Accord reached by international banking managers.

"This means China's commercial banks, especially the four large State-owned banks, will have to achieve the goal before they get listed," Dong said.

By the end of June, the non-performing asset rate of China Construction Bank dropped 5.69 percentage points from the first quarter of this year to reach 3.08 per cent.

With the aim of replenishing the bank's capital base, China Construction Bank plans to issue no more than 40 billion yuan (US$4.8 billion) worth of subordinated bonds. The bonds rank after other bank liabilities in terms of claims on bank assets.

In July, the bank issued 15 billion yuan (US$1.8 billion) in subordinated bonds in the first sale of the bonds. The amount sold was 50 per cent more than earlier planned.

It will issue up to 10 billion yuan (US$1.2 billion) in a second sale of debt on Friday.

The bank plans to issue 8 billion yuan (US$963 million) in 10-year bonds this time. But it has reserved an option to expand that to 10 billion yuan (US$1.2 billion), depending on investor demand.

Industry experts say that an issue of subordinated debt is an effective measure for banks to increase their capital adequacy level.

After issuing all the bonds, the bank's capital adequacy level is expected to reach more than 8 per cent.

Last month, the Bank of China, another selected by the central government for its pilot banking reform, reorganized itself into a joint stock company, following the establishment of the Bank of China Limited.

The joint stock company, which has a registered capital of 186.39 billion yuan (US$22.5 billion), took control of all of Bank of China's assets, debts, employees and business.

(China Daily September 16, 2004)