Temasek Holdings Pte, the largest overseas shareholder in Chinese banks, plans to add to its more than S$8 billion (US$5.1 billion) of investments in the country, reducing reliance on its home market of Singapore.

The state-owned company, which has shares in two of China's four biggest banks, may buy property and other companies that can benefit from China's expanding middle class, Frank Tang, head of Temasek's investments in China, said in an interview.

Temasek, founded in 1974 to nurture the development of Singapore companies, has in the past four years invested in at least a dozen Chinese companies, buying 4.65 per cent of Bank of China, the nation's No 2 lender, and 5.9 per cent of China Construction Bank, the third biggest. Since 2005, it has spent more than S$7 billion on Chinese lenders, about 90 per cent of its spending in the country.

That includes a 3.9 per cent stake in China Minsheng Banking Corp, the nation's biggest privately controlled lender.
Temasek isn't alone. US and European lenders, including Citigroup Inc, Bank of America Corp and HSBC Holdings Plc, have spent more than US$16 billion in the past two years buying into local banks.

"There is a good reason why global financial investors such as Temasek are flocking to buy Chinese banking assets, and given China's booming economy, high lending margins that are regulated by the State," said Andy Xie, chief Asia economist with Morgan Stanley in Hong Kong. "Still, the flipside is their bad loan problem and corruption, which is a rising risk."

Temasek's unrealized gains from its banking investments have surged as bank shares have risen. It paid US$2.47 billion for a 5.9 per cent stake in China Construction, which is now worth US$5.7 billion based on the closing share price on September 1, according to Bloomberg calculations. The company paid US$2 billion for 4.8 per cent of Bank of China. The stake has since been diluted to 4.65 per cent and is worth US$4.9 billion.

"Banking is a good proxy of the economy," said Eric Chen, North Asia president for Asia Financial Holdings Pte, a Temasek unit invested in banks. "You see the rise in the middle class and that means their wallets are going to grow. So, in 15 years, our investments are going to be worth a lot of money."

Bank of China last week reported first-half profit rose 28 per cent to a record 19.5 billion yuan (US$2.5 billion), buoyed by rising demand for loans
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"Our focus now is to make sure these two banks do well because if we build a good reputation in China, we will get invited to more deals," Chen said. "Ten years from now, China's financial service industry is going to be so different from what it is today. You just have to keep your eyes open."

Temasek last month paid US$50 million for a 9.9 per cent stake in Xinyu Hengdeli Holdings Ltd, China's largest watch retailer. It has shares in Dongfeng Motor Group Co, which makes engines and light trucks, regional cargo carrier Great Wall Airlines Co, jet fuel supplier China Aviation Oil (Singapore) Corp and China Power International Development Ltd, the nation's fifth-largest electricity generator.

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