BBVA, Spain's second-biggest bank, has agreed to invest €989m in China's Citic Group in a bold move designed to take advantage of the liberalisation of China's banking industry, which takes effect on December 11.

BBVA will pay €501m for a 5% stake in China Citic Bank and €488m for a 15% holding in Citic International Financial Holdings. The agreement also includes an option allowing BBVA to raise its stake in China Citic Bank to 9.9%.

Citic International Financial Holdings currently owns 16.4% of Citic Bank, which has 416 branches. The sale of the stake to BBVA paves the way for Beijing-based Citic Bank to raise $2bn in an IPO in Hong Kong.

BBVA's China strategy has changed significantly in recent months. Given Spain's limited trade links with Asia, BBVA has historically chosen to focus on other regions of the globe, most obviously Latin America. China was seen to play a minor role with BBVA's presence limited to representative offices and a handful of branches for specific opportunities such as trade finance.

But over the summer, the bank has woken up to the need to have a strategic presence in China, not least because of the growing trade flows between China and Latin America.

Foreign banks like Bank of America, UBS and RBS have spent more than $18bn in the past two years expanding in China, according to Bloomberg.

A consortium led by Citigroup last week signed a $3.1bn deal to take an 86% stake in the bankrupt Guangdong Development Bank after a year-long battle with rival consortium led by France's Société Générale. Citigroup will have 20%, the largest stake that that single foreign entity is allowed to have in a Chinese bank.

Interestingly, IBM, the US computer giant, is also a member of the consortium and will own 4.7% of the Chinese bank. IBM clearly hopes that the connection will lead to lucrative services deals with the bank as it modernises its technology infrastructure and business practices.

Nevertheless, It is extremely unusual for IT companies to buy stakes in potential customers on the hope that it will generate new business. IBM has just signed a three-year deal with Germany's HypoVereinsbank covering application development, but Big Blue does not own a stake in the German bank, as far as we know.

I suspect that IBM puts its investment in Guangdong Development Bank in a broader context, as a demonstration of its faith in China's new economy. In similar vein, Big Blue recently moved its worldwide supply procurement division from the US to China -- see this EngagingChina story.

More on Guangdong Development Bank in this Financial Times article ($).

Western businesses considering investing in China's red-hot banking sector should first read this New York Times article, which argues that China's big banks are still burdened with more non-performing loans than they acknowledge. More on the NPL problem in this EngagingChina story.

Elsewhere on the finance front:

• The Qualified Domestic Institutional Investor (QDII) scheme, which lets Chinese investors buy financial assets overseas, is "performing below expectations", according to an official interviewed by the South China Morning Post. One reason is the continuing appreciation of the yuan, which reduces returns for local investors when foreign profits are repatriated. In addition, the high-flying local A-share market offers Chinese investors stellar returns without the currency risk. Chinese banks and fund managers have been given license to invest $12.6bn in foreign securities under the QDII program. More on QDII in this earlier story.

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Technorati : BBVA, Citic, Citigroup, Guangdong, IBM, Spain, banking, china, competition, investment