In mid November, Bank of American Corp. (BAC) ponied up more than $7 billion to nearly double its already existing investment in the state-owned China Construction Bank Corp., a move that gave the biggest U.S. bank a 19% stake in China’s second-largest lender.

Less than two months later, however, BofA sold $2.8 billion of its shares in the Beijing-based China Construction Bank, a jarring about face made necessary by the U.S. bank’s need to raise cash.

And Bank of America isn’t the only Western lender making such a move.

Just this week, the Royal Bank of Scotland Group PLC (ADR: RBS), Great Britain’s biggest government-controlled bank, sold its $2.3 billion stake in the Bank of China Ltd. (Pink: BACHF), the No. 3 Chinese lender - also because RBS needed to replenish its capital position. That stake represented 4.3% of the Bank of China’s outstanding shares.

RBS, BofA and UBS AG (UBS) - all early “strategic investors” in China’s biggest banks - have now each trimmed their investments in those banks, thanks to the expiration of restrictive “lockup periods.” UBS said last month that it had sold its entire 1.33% stake in the Bank of China.
More divestitures are expected.

“Undoubtedly, foreign banks will continue to expand their footprints in China,” Zhao Xijun, deputy director of the School of Finance at Renmin University of China, told The Wall Street Journal. “But they will be more focused on developing their own businesses, rather than buying a Chinese lender.”

Cash-strapped Western banks - desperate to raise money in the face of the worst financial crisis since the Great Depression - are paring their stakes in top China banks. That will bring in needed capital today but at the cost of lost future profits tomorrow in an economy that’s the world’s fastest-growing, and a market in which a burgeoning middle class figures to create all sorts of lucrative businesses for players with the ability to stay in the game.

On China’s end, the divestitures are forcing Beijing to reassess its strategy of using foreign know-how to assemble a world-class banking system.

Since 2005, foreign financial institutions such as Bank of America and the RBS have pumped more than $25 billion into Chinese banks as part of a high-dollar game of quid pro quo engineered by the Red Dragon’s regulators: Foreign investors would gain access to China’s banking market, and in return would show China’s banks how to make money in a free-market environment.

As these developments demonstrate, the global financial crisis continues to worsen, meaning the bailout strategies used so far haven’t had the desired benefit. BofA received a $15 billion infusion from the U.S. Treasury Department’s $250 billion “recapitalization” effort. The Edinburgh-based RBS received $29 billion in bailout money of its own after taking $10.2 billion in write-downs in 2008.

As a Money Morning investigation has demonstrated, many U.S. banks used bailout money to go on a global shopping spree, instead of retiring bad debts or boosting lending to businesses and consumers. The payback has been rather quick in some cases.

As the divestments have now demonstrated, the worsening financial crisis is forcing financial institutions to sell promising assets, and to do so at a point when the value of those holdings is probably at or near their nadir.

“For RBS, they don’t really have much choice,” Samuel Chen, a Hong Kong-based analyst at JPMorgan Chase & Co. (JPM), told Bloomberg News. “They would probably rather hold it.”

Indeed, as one analyst said, Western banks are selling out at prices where they should actually be buying.

“Although the selling by foreign strategic investors may put some short-term pressure on prices, bank stocks are undervalued given their long-term growth prospects,” Zhang Xi, a Beijing-based analyst at China Galaxy Securities Co., told Bloomberg News.. “Now is a good time to buy Bank of China and other big lenders.”

Goldman Sachs Group Inc. (GS) still owns 16.5 billion shares in Industrial & Commercial Bank of China, the world’s largest bank by market value, and has agreed not to sell the shares until after April 28, according to published reports. American Express Co. (AXP) and Allianz SE (ADR: AZ) are among the Commercial Bank of China’s other U.S.