Analysts question the soundness of a two billion yuan investment in a fragile sector China Yangtze Power has revealed a controversial plan to invest two billion yuan in its creditor China Construction Bank Holding (CCBH), the would-be listing vehicle of the mainland's No3 lender. While the move is seen by analysts as an example of state companies helping each other financially, they say it lacks business justification. Yangtze Power, the mainland-listed flagship of the Three Gorges Dam project, said in a filing to the Shanghai Stock Exchange that its board had approved a proposal to invest the amount as a founding shareholder of CCBH. The proposal is subject to shareholder approval at a meeting expected soon. A company spokesman said it had been 'invited' to become a founding shareholder. The proposed investment has raised some concerns as it could expose the company to risks in the mainland's fragile banking sector, which is undergoing reform. 'The risk may not be high as China Construction Bank is being restructured and will be listed, but the proposal has a problem logically,' said Kim Eng Securities head of China research Eve Chu Wen-yee. 'If it has extra cash, it should first pay down its debt.' Another analyst said: 'Investors are buying China Yangtze's shares for power-sector exposure, not the banking sector.' The company spokesman said it took up the bank's invitation because it represented a good investment opportunity. He said the board had studied the investment's merit and found it attractive. He denied the firm was under government pressure to take a stake in CCBH. 'It is a very special investment opportunity that we would not normally consider,' he said. UBS head of Asian utilities research Alice Hui Suk-fong said it would not be a bad deal for Yangtze Power, considering it and its shareholders had been enjoying plenty of state support. She said the firm's main profit contributor, the Gezhou Dam hydro project, was sold by the state to Yangtze Power at a low valuation, and the government had granted it a 9 per cent value-added tax rebate estimated to rise from last year's 465 million yuan to 1.4 billion yuan in 2007. According to a BOC International research report, China Construction Bank (CCB) could be worth 504.61 billion yuan based on an estimated 121.3 billion issued shares before its listing and a value of 4.16 yuan each. Assuming this, Yangtze Power's two billion yuan could give it a 0.4 per cent stake. CCB is expected to list late this year or early next. Yangtze Power is not the first power firm to invest in the financial sector. In 2000 Zhejiang Southeast Electric Power invested 772.5 million yuan in China Everbright Bank and Bank of Communications. The two banks were planning to list at the time. Invitations by listing candidates for fellow state-owned firms to invest in them is a common practice in the mainland's state sector. When Yangtze Power listed in November, it introduced Huaneng Power International, China Nuclear Industry Group, China National Petroleum Corp and State Grid Corp of China as shareholders. CCB is one of Yangtze Power's biggest creditor banks. According to Xinhua, the bank had granted at least 9.3 billion yuan in credit capital to Yangtze Power and its parent China Yangtze Three Gorges Project Development as of November last year. Separately, Yangtze Power posted a 357.88 per cent year on year jump in net profit to 1.39 billion yuan in the first half after it bought two generating units from its parent and the government raised its average tariff by 37.1 per cent.