Singapore's Temasek sold stakes in two of China's biggest banks on Wednesday to raise $3.6 billion, in a move likely aimed at reducing the sovereign investor's big exposure to the financial sector and building up a warchest.

The sale of stakes in Bank of China <3988.HK> and China Construction Bank <0939.HK> pushed down shares of the two lenders in Hong Kong by more than 3 percent on Wednesday and triggered broader weakness in the territory's stock market.

Temasek's move is reminiscent of late 2007, when it made a similar selldown in the two Chinese banks a few weeks ahead of its large stake purchase in Merrill Lynch, an investment that turned sour during the global financial crisis.

The Singapore investor has been recently building its cash levels through profitable exits from investments such as food and beverages company Fraser & Neave in which it sold its stake for S$1.3 billion in July last year, making a hefty gain of 49 percent.

In October last year, Temasek sold a $607 million stake in South Korea's Hana Financial <086790.KS> Group.

Temasek owned about 7 percent of China Construction Bank and the sale of 1.5 billion Hong Kong-listed shares would lower its stake to just over 6 percent, according to Thomson Reuters data. Temasek would own about 6 percent of Bank of China's outstanding Hong Kong shares after it sold 5.2 billion shares.

I am quite sure that they would be looking to make that money work somewhere down the line, said Song Seng Wun, regional economist at CIMB in Singapore.

Song said the move could be sparked by concerns about the global economy with risk emerging from Europe while the U.S. economy is also going through a difficult patch.

It is to take the money off the table and perhaps putting them to use when the opportunity comes again.

The stake sales come ahead of its annual review planned later this month, which is set to show that exposure to the financial sector was cut from the 37 percent at end-March 2010.

Temasek's portfolio probably rose in the most recent financial year for the second year in a row, as it followed a cautious strategy of staying invested close to home, a path it has pursued since the financial crisis.

The gains in Temasek's portfolio are still likely to pale in comparison to the 43 percent surge seen in 2009/10 when it recovered from the pain it suffered during the financial crisis following billions of dollars of losses on Western banks.

With one-third of its portfolio in Singapore companies, Temasek tends to outperform the Straits Times Index <.FTSTI>, which gained about 8 percent between April 1 2010 to March 31 this year.

The state investor is also likely to formally respond to speculation that its chief executive Ho Ching may leave, which she recently denied in an internal communication to staff.

They're recovering their portfolios, number one, and number two it is a transition period and during the transition period I think on average people normally do not want to take too many too big bets, said Michael Preiss, chief equity strategist at Standard Chartered Bank.

SALE COVERED IN HOURS

The Bank of China stake was sold at HK$3.63 a share, raising

HK$18.84 billion ($2.4 billion), while the CCB stake was sold at HK$6.26 a share, raising HK$9.39 billion, a source familiar with the matter told Reuters.

The large block sales were covered within an hour after going to market and the books were closed in three hours, showing strong appetite from investors for the deal, added the source, declining to be named due to not being authorized to speak to the media.

By midday, Bank of China shares were down 3.4 percent at HK$3.73 while CCB shares had lost 2.9 percent to HK$6.29. The benchmark Hong Kong share index <.HSI> was down 0.4 percent.

Temasek bought a 10 percent stake in Bank of China in 2005 for $3.1 billion and invested $500 million in the bank through its initial public offering. It invested over $1 billion in CCB's 2005 IPO.

Temasek has been paring exposure to the financial sector after suffering billions of dollars of losses from its investments in Barclays and Bank of America Corp during the financial crisis.

The selldown also comes after some analysts have turned cautious about the outlook for Chinese banks. On Tuesday, Moody's issued a warning of a possible ratings downgrade for Chinese banks due to their higher-than-expected exposure to local government debt.

This would have been planned much earlier and it is a coincidence you got a report on Moody's, said CIMB's Song.

(Additional reporting by Elzio Barreto and Fiona Lau in HONG KONG and Kevin Lim in SINGAPORE)

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