Oct. 22 (Bloomberg) -- Agricultural Bank of China will get $19 billion from the government, paving the way for the lender to sell shares to the public and capping a decade-long bailout of the nation's banking industry.

The cash injection and the removal of most of the bank's $120 billion of bad loans will be announced today, a company official with knowledge of the matter said, declining to be identified before a press briefing at 3:30 p.m. A unit of China's sovereign wealth fund will take a 50 percent stake and China's finance ministry will hold the rest, the person said.

``This culminates years and hundreds of billions of dollars of backstopping of China's banking industry,'' said David Liao, who helps manage $975 million at HSBC Jintrust Fund Management Co. in Shanghai. ``From now on, Chinese banks are supposed to walk on their own and the current economic downturn gives them the opportunity to prove themselves in terms of risk management and internal controls.''

The bailout will complete a reorganization of China's banking industry that's so far cost the government $500 billion, after years of state-directed lending caused bad debts to balloon. Unlike competitors such as Industrial & Commercial Bank of China Ltd., which sold stock when growth was booming, Agricultural Bank's overhaul comes as the global credit crunch saps demand for China's exports and equity offerings.

Slowing Growth

Agricultural Bank, the least profitable of the four biggest state-owned commercial banks, was founded in 1979 to serve the country's 800 million farmers. It was China's third-largest lender by assets, operated 24,000 outlets nationwide and employed nearly half a million people at the end of 2007. ICBC, the nation's largest, owns about 16,400 branches nationwide and employs 351,000.

The bank plans to sell stakes to strategic investors before going public, following a template used by ICBC, China Construction Bank Corp. and Bank of China Ltd. The nation's three largest lenders received a combined $60 billion in capital injections from the state before raising $43 billion selling shares in the past two years.

The global economic slowdown and financial-market turmoil may make it harder for Agricultural Bank to bring in strategic investors and make its initial public offering. China's economy grew 9 percent in the third quarter, the slowest pace in five years, underscoring concern that the spreading financial crisis threatens the biggest contributor to global growth.

Not Attractive

The bank's remit of serving the country's farmers and less affluent rural areas and may also count against it.

``Agricultural Bank wouldn't be as attractive to investors as other big Chinese banks because its focus on rural areas basically limits its growth and profitability,'' said Li Qing, a Shanghai-based analyst at CSC Securities HK Ltd. ``The market has some potential given the government support for rural development, but we won't see that turn into profit anytime soon.''

It may take up to three years to prepare the bank for a public listing. China Construction Bank listed in October 2005, two years after its state bailout while Bank of China took three years.

The government will remove bad debt from Agricultural Bank's balance sheet to reduce the non-performing loan ratio to about 4 percent, the person said. Agricultural Bank, with 6 trillion yuan ($878 billion) of assets, had 818 billion yuan of delinquent loans at the end of 2007, accounting for 23.5 percent of its total advances, according to its annual report.

Delinquent Loans

Its bad-loan ratio is currently four times China's industry average of 5.6 percent, according to data from the industry regulator and annual reports.

The government may have to spend $200 billion total to bail out the company by removing delinquent loans and injecting capital, Standard & Poor's estimated in October 2007. That would be almost double the cost of recapitalizing ICBC, now the world's largest bank by market value, in 2005.

Premier Wen Jiabao has made boosting incomes for China's farmers a priority, promoting loans to them and raising public works spending to double their earnings by 2020. The average income of a rural resident was 4,140 yuan ($605) in 2007, less than a third of an urban counterpart, according to government statistics.

Agricultural Bank, which controls 13 percent of China's deposit and loan markets, will return its focus to farmers and agricultural businesses after an earlier shift to urban customers for growth, the government has said. Chinese banks have closed 31,000 rural branches over the past decade because of mounting bad loans and operating losses.

Improve Competitiveness

China has reorganized state-owned lenders, including city commercial banks and policy banks, and pushed them to sell shares and bring in foreign investors. The move has forced the banks to meet international accounting, disclosure and capital adequacy standards, which may help improve competitiveness.

Fourteen of the nation's 130 commercial banks are now listed in China and Hong Kong, and count Bank of America Corp, HSBC Holdings Plc and Goldman Sachs Group Inc. among their foreign strategic investors.

China Construction Bank Corp. was the first of the nation's four largest to go public in October 2005, raising $9.2 billion from selling shares in Hong Kong. Bank of China followed with an $11.2 billion initial public offering in June 2006 and ICBC set a record with its $22 billion sale in October of that year.

Government-led recapitalization and public listings have strengthened financial positions and profitability at the three banks, which are now ranked among the world's 10 largest lenders by market value. Their non-performing loan ratio dropped to an average 2.4 percent as of June 30, compared with about 20 percent before recapitalization.

To contact the reporters on this story: Luo Jun in Shanghai at at jluo6@bloomberg.net

Last Updated: October 22, 2008 00:52 EDT