The government authorities have set the terms for China Merchants Bank (CMB) and Industrial & Commercial Bank of China (ICBC) in making payment for Hong Kong's Wing Lung Bank, said two people familiar with the matter.

The two State-owned banks, vying for a controlling stake in family-run Wing Lung, were asked not to pay more than 2.85 times book value, the people said on condition of anonymity. Wing Lung's owners had sought at least three times book value.

Regulators are concerned the winner will overpay for Wing Lung, after the bank posted a first-quarter loss on writedowns of credit market investments, one of the people said.

Wing Lung plunged as much as 9.6 percent yesterday hitting a day low of HK$135.40 before closing at HK$144.40. However, Maria Fung, the bank's company secretary, declined to comment.

The government is ICBC's largest shareholder and owns a combined 70.6 percent after the bank's $22 billion IPO in 2006, the world's largest. China Merchants Group, a State investment arm, is the biggest shareholder in CMB with a 12.1 percent stake.

Xie Taifeng, a Beijing-based spokesman for ICBC, declined to comment, as did Guo Xiaoli, a Shenzhen-based spokeswoman at CMB.

The price guidance was first imposed by the Ministry of Finance on Beijing-based ICBC, the people said.

CMB was then urged by mainland's banking regulator to follow, one of the people said.

It is unclear whether Wing Lung's book value as of Mar 31 this year or Dec 31, 2007 will be used for calculating offer prices, the people said. ICBC and CMB have used the end of 2007 book value as a reference for bids as it provides more room for higher offers, they said.

Wing Lung's equity fell 6.5 percent in the first quarter, to HK$11.67 billion. Based on Mar 31 figures, the maximum valuation imposed will imply HK$143 per Wing Lung share, valuing the company at HK$33.15 billion.

Using the bank's Dec 31 book value would yield a price of HK$153 per share, or HK$35.49 billion.

The family of chairman Michael Wu, seeking to sell a 53 percent stake, had sought at least three times book value, people familiar with the matter said earlier. Hong Kong's 18 publicly traded banks are valued at an average 2.45 times book value, according to data compiled by Bloomberg.

Bloomberg

(HK Edition 05/29/2008 page2)