BofA & China Construction: Share Sale Yet Another Feather In Asia Banking Cap

Guess who is propping up the bad balance sheets of western banks? Here's a hint: it's the same people who are providing funding for the unstable one that is the U.S. economy.

A little while ago here at BNET I pointed out that a number of beleaguered U.S. and European financial institutions have been selling their stakes in mostly profitable Chinese banks in order to fill holes in their own short-term financing requirements. Among those institutions were Amex, Goldman Sachs, Fortis, and RBS â€" all of which have already divested millions in Chinese share stakes.

Now, there's another bank to add to that list. Tuesday morning, Bank of America was rumored to be selling its entire free-floating (i.e. "sellable") 5.8 percent stake in China Construction Bank for around $7.3 billion in order to meet its capital requirements set out by last week's stress tests.

Shares in China Construction Bank rose 1.22 percent on the news, since the sale was widely seen as beneficial for the bank, which now doesn't have the threat looming over it of yet another western banking institution ready to dump its stock at just a moment's notice.

What is most notable is how the huge divestments of Chinese banks have been absorbed so easily among investors in Asia. This year, western financial institutions have sold some $15 billion of shares in Chinese banks, according to Bloomberg.

"I'm surprised such a big chunk of shares could be absorbed by a small group of investors, and the share price is still holding up well," Danny Yan, a portfolio manager at Taifook Asset Management in Hong Kong told the newswire.

In typical global recessionary conditions you wouldn't ordinarily expect to see such big purchases of assets taking place -- especially in the relatively short spaces of time that the deals have taken to pull off. Rather, you might see tepid buying here and there from a number of institutions, with the stock price of the firm being sold consequently sinking.

In a way, the deals are reminiscent of purchases of U.S. investment banks by Japanese megabanks in the final quarter of last year. The apparent liquidity of Asian financial firms should not be underestimated -- especially now that most of them are much more autonomous than they previously were. This newfound independence and relative strength gives the Asian banks enormous leverage in the global banking business, and has sidelined much of western banks' participation in high-growth emerging markets.

These share sales might look good -- even necessary -- for now, but the message of the trades is clear. European and American banks are trading cash today for growth tomorrow. Unfortunately, it's only growth that is going to enable them to increase earnings sufficiently to dig their way out of this mess.

MoneyWatch Poll: How Has the Financial Crisis Affected You?