CDB sees reasons to decline Barclays offer

By Eadie Chen

BEIJING (Reuters) - China Development Bank, which holds a 3.1 percent stake in Barclays (BARC.L), sees several good reasons to shy away from the bank's offer of new shares, sources close to the Chinese lender said on Monday.

Barclays plans to issue billions of pounds worth of equity to new and existing shareholders to strengthen its frayed balance sheet. Market commentators had expected that China Development Bank (CDB) would take up the offer to avoid having its holding diluted.

But political and financial concerns make CDB reluctant to invest more money in Barclays than the 2.2 billion euros it paid for its initial stake last July, the sources said. They added that the Chinese bank had not yet made a final decision.

"The losses on that so far, the scandal surrounding the bank's (CDB's) vice president and the bank's ongoing structural reform make it very unlikely that CDB will make any immediate major purchase," an official in the banking sector told Reuters.

CDB has seen the value of its investment in Barclays, made just before the credit crisis rocked financial markets, fall by more than 50 percent over the past 10 months.

"CDB is now very cautious about risks in overseas investments," said a separate banking source close to the Chinese bank. "Even though the price is much lower than last year, who knows whether it might not dip further?"

CDB had been expected to invest $2 billion (1 billion pounds) in Citigroup (C.N) in January, when the U.S. bank sought a massive capital infusion, but opposition from high-ranking officials in Beijing scuppered the deal at the eleventh hour.

Already under criticism for the poor performance of its Barclays' investment, the timing for CDB to purchase more shares in the British bank would prove awkward, the sources said.

Wang Yi, the Chinese lender's vice president, is under investigation for suspected security market irregularities, two sources familiar with the matter said last week.

The news that Wang, who served as a vice-chairman of China's securities watchdog from 1995 to 1999, was detained by the Communist Party's disciplinary body has attracted huge interest on Chinese blogs.

CDB is also in the midst of reforming its shareholding structure and mapping out a new strategy for its core businesses, a source at the bank said.

The state-owned bank, traditionally one of three in China that lend funds in support of government policies, received a $20 billion capital injection in December to help remake it as a commercial bank.

The sources declined to be identified as they are not authorised to speak to the media.

When CDB first bought into Barclays, it agreed to invest up to a further 7.6 billion euros for a 7.7 percent stake if the British bank prevailed in its bid for the Dutch lender ABN AMRO. ABN AMRO was won by a consortium led by Royal Bank of Scotland (RBS.L).

(Editing by Simon Rabinovitch and Quentin Bryar)