Money

China studies $13b investment in Spain banks

(Agencies)
Updated: 2011-04-14 09:54

MADRID - Chinese investors including the country's sovereign wealth fund may inject $13 billion into Spanish banks, a government source said on Wednesday after Spain's premier met financial authorities in Beijing.

There was no immediate comment from Beijing and it was not clear what terms would make the risk attractive to China, which has invested cautiously in overseas financial markets in the last couple of years.

Concerns about delays in recapitalizing Spain's ailing savings banks -- heavily exposed to bad loans from a burst property bubble -- have overshadowed the euro zone state's efforts to convince markets it will not need a bailout.

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According to official estimates the savings banks -- which are known as cajas and hold about half the deposits in Spain's financial system -- need about 15 billion euros in fresh funding to meet strict new financial targets.

But private estimates go eight times higher than that when taking into account future losses from real estate writedowns.

Spanish Prime Minister Jose Luis Rodriguez Zapatero is visiting China and Singapore this week, meeting with officials and fund managers to persuade them that Spain's sovereign bonds and its financial system are a good investment.

Speaking by telephone from Beijing, the Spanish government source told Reuters that Chinese sovereign wealth fund China Investment Corporation was studying an investment of $9 billion, and that private entities might add an additional $4 billion.

China is looking at two possible investment structures, either investing directly in specific cajas, or savings banks, or creating a general fund that the cajas would be able to tap, another Spanish government source told Reuters in Beijing.

"If this is true it is positive for the market. If CITIC or another Chinese vehicle invests 9 billion euros that would represent around 5 percent of the equity in the Spanish banking system," said a London-based analyst who asked not to be named.

"I wonder if some of this is to buy banks' or cajas' debt, in which case the impact gets diluted."

Doubts about the cajas

Spain's borrowing costs have soared in the past year and a half due to concerns about its large deficit, but some confidence has returned as Zapatero has cut spending and pursued the consolidation and recapitalization of the savings banks.

But while Qatar and United Arab Emirates sovereign wealth funds intend to invest 450 million euros in the cajas, private investors who have looked at the books say they will only invest at a steep discount, due to doubts about the scale of overall losses.

In recent weeks one merger of four savings banks fell apart, and two financial entities have indicated they need more capital than originally thought.

Spain's central bank is scheduled to report on Thursday which recapitalization plans it approves from the cajas it deemed to be short of capital. Zapatero met on Wednesday morning in Beijing with representatives from China Investment Corporation; top Chinese financial conglomerate CITIC Group; China's banking regulatory commission and other entities.

Dean Tenerelli, a fund manager at T Rowe Price International, said Chinese interest would be strategic rather than seeking returns.

"There are two reasons behind China's investment interest. Firstly political, in terms of strengthening links with Western Europe and spreading their vast wealth around. Secondly, they like to study how foreign countries and companies are run. Spain has a reasonably efficient banking system so they can learn from that," Tenerelli said.