By staff reporter Wen Xiu

China Construction Bank (SH: 601939, HK: 0939) saw its share price plunge to 6.46 yuan on March 27, close to its initial offering price of 6.45 yuan half a year ago.

A temporary fluctuation of the market price is not too disturbing, but 2008 is guaranteed to be a year in which the Chinese economy and banking sector face real challenges.

The combination of Chinese macroeconomic control, credit tightening, and American sub-prime crisis have created an environment where the price of banking sector stocks have to be evaluated again. China’s economic growth meant the reform of non-tradable shares in state-owned banks created a bull market. So, should banks such as CCB do to maintain their performance?

Guo Shuqing, chairman of China’s CCB and who is famous among state bankers for his aggressive reforms, spoke to Caijing about the challenges and opportunities that state-owned banks are facing.

In Search of New Profit-making Areas

Caijing: Earlier you mentioned that macroeconomic control will also create an opportunity and challenge for banks to transform. Will CCB maintain its profit and growth?

Guo: Of course, a tighter credit policy made banks decrease lending, but other businesses will not decrease. I do not believe CCB will be negatively affected, instead we now have an external environment that motivates us to push forward our strategic transformation.

Our profits will grow in several sectors. First of all, our traditional competitiveness in infrastructure loan will not die. Investment in infrastructure will not decrease, but instead will increase. The snow storm earlier this year destroyed many roads and the electricity grid. As a result, the bank will make a larger portion of loans to this sector. Secondly, small and medium enterprises are our new growth area. Last year, CCB made new loans totaling 31.4 billion yuan in this sector, an increase of 16.3 percent. This year the growth will continue. The third new growth area is rural finance, particularly in rural areas where industrialization and urbanization have been achieved.

A Strategic Investor

Caijing: The sub-prime crisis may result in a reshuffle of the global financial paradigm and many global financial giants need liquidity. Do you think CCB will take the opportunity in pursue overseas acquisitions?

Guo: The American market has a lot of uncertainties at this moment. It is unclear whether the price has hit the bottom. Also, there are concerns around whether the risks have been fully exposed. Most importantly, we want to be a strategic investor as opposed to simply a share holder. Our priority is to expand our business -- more networks, more technology, and more talents – rather than sheer business returns. Whether our potential targets have reached their lowest price is not what we are most concerned with.

Caijing: When is the best time for an overseas acquisition?

Guo: First of all, it is a question of where we have found objects that we need. Second, the price is important although not the first priority. We need to make sure that our target has good quality assets and understand to what extent it is exposed to market risk. These all come through adequate research and investigation. It is hard to tell now when the best timing is. When it comes to the right target, if we have to buy it at a higher price, we still think it is the right thing to do.

BOA Won't Cut Shares of CCB

Caijing: Bank of America (BOA) has been a strategic investor for CCB. Rumors said that BOA is thinking about selling its stocks in CCB to offset its loss in sub-prime crisis. We heard that all the shares of CCB held by BOA will pass their lock-up period after this June. Are you aware that they have such a plan?

Guo: If BOA wants to cut down its shares in CCB, it will talk to Central Huijing, (BOA bought the shares from Huijing). I am not aware that BOA plans to sell our stock. What I know is that many institutions hope to invest in us. I do not believe that BOA will give up its option.

If there are any changes, it is that they can only increase a limited range of shares in CCB. According to our contract, BOA can hold up to 19.9% of the shares. In the past two years, the market has shifted so much. So, BOA agreed that they will not go beyond 10 percent. Right now, BOA owns 8.5 percent of our shares.

BOA is our long-term strategic investor. They earn great profits from their investment through CCB’s dividends every year. I do not believe that in the entire world they could find a better investment target than CCB. We are a real profit-making machine for them.