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* BBVA first invested in CITIC Bank in 2006
* BBVA to make cash loss of up to 120 mln euros from sale
* Retains 9.9 pct stake and set to open its own China branch
* Attention turns to Caixabank's stake in Bank of East Asia
By Denny Thomas and Sarah White
HONG KONG/MADRID, Oct 17 (Reuters) - Spanish lender BBVA agreed to sell $1.27 billion of CITIC Bank Corp shares to bolster its capital, becoming the latestforeign bank to start unwinding often difficult Chinesepartnerships.
Spain's second-biggest bank by market value is selling a 5.1percent stake in the Chinese lender to state-owned parent groupCITIC Ltd. That will leave BBVA with 9.9 percent, just below aregulatory threshold that would penalise it for owning shares inanother bank.
Tougher global rules on banks' capital ratios and theirownership of financial institutions have forced BBVA and othersto set aside more cash and sell holdings in foreign lenders.
Several major U.S. and European banks including Bank ofAmerica and Switzerland's UBS have alreadysold out of Chinese lenders, cutting back partnerships thatcould be profitable on paper but were not always productive atan operational level.
The foreign exits also come as the Chinese banking system isshowing signs of stress, with bad loans picking up as economicgrowth slows.
BBVA said on Thursday it would make a cash loss of up to 120million euros ($161.90 million) from the CITIC sale. It willalso take a 2.3 billion hit to 2013 earnings after reducing thevalue of CITIC shares remaining on its books to the marketprice.
Analysts at Sabadell said the losses would almost halvetheir 4.7 billion euro forecast for BBVA's net profit this year.
BBVA said the sale would free up 2.4 billion euros ofcapital under Basel III rules, which start to come in next year.The rules penalise lenders for holding stakes of more than 10percent in other banks.
Unlike BBVA, Bank of America generated a paper profit morethan five times the original cost of its investment in ChinaConstruction Bank Corp (CCB) when it ended the eightyear-old partnership in September.
BBVA said in 2009 it had invested a total of about 3 billioneuros in CITIC.
Shares in BBVA and CITIC Bank, China's 10th-largest lenderby market value, were little changed on Thursday.
TRICKY CHINESE VENTURES
Foreign banks snapped up stakes in Chinese lenders as they prepared to list on stock markets five to six years ago.
The partnerships were meant to give them a foothold in theworld's second-largest economy and enable Chinese banks to gainexpertise in developing new products and risk management.
But some of the ventures have been slow to bear fruit. BBVA,which entered China seven years ago, has yet to close a mergerand acquisition deal as an adviser in Asia yet, for example.
BBVA's move has turned investors' attention to anotherSpanish bank holding in a Chinese lender - Caixabank's 15.9 percent stake in Hong Kong-based Bank of East Asia Ltd.
HSBC Holdings Plc also has a 19.9 percent holdingin China's Bank of Communications Co Ltd.
BBVA said the sale of part of its CITIC stake will allow itto try a new strategy in China, working with its partner on anon-exclusive basis.
"BBVA plans to open a fully-operational branch in China,something that we couldn't do before," BBVA's Chief FinancialOfficer Manuel Gonzalez Cid said, adding that China remainedattractive in part because of trade-finance links with LatinAmerica, where BBVA has big operations.
