May 28 (Bloomberg) -- The Chinese government capped what China Merchants Bank Ltd. and Industrial & Commercial Bank of China Ltd. will be allowed to pay for Hong Kong's Wing Lung Bank Ltd., said two people familiar with the matter.

The two state-owned banks, vying for a controlling stake in family-run Wing Lung, were asked not to pay more than 2.85 times book value, the people said, declining to be identified as talks are ongoing. Wing Lung's owners had sought at least three times book value.

China is increasing scrutiny of acquisitions after money- losing investments in Blackstone Group LP, Barclays Plc and Morgan Stanley in the past year. Regulators are concerned the winner will overpay for Wing Lung, valued at $4.5 billion at yesterday's close, after the bank posted a first-quarter loss on writedowns of credit market investments, one of the people said.

``This is a bit funny and unheard of, but in China these kinds of things can happen,'' said Ivan Li, a Hong Kong-based analyst at Kim Eng Securities. ``This will set a bad example and may send a quite negative message to the market.''

Wing Lung fell 6.2 percent to HK$140.50 at the 12:30 p.m. lunchtime break in Hong Kong trading, the biggest fall in four months. Maria Fung, the bank's company secretary, declined to comment.

The government is ICBC's largest shareholder and owns a combined 70.6 percent after the bank's $22 billion initial public offering in 2006, the world's largest. China Merchants Group, a state investment arm, is the biggest shareholder in Merchants Bank with a 12.1 percent stake.

Ministry of Finance

Xie Taifeng, a Beijing-based spokesman at ICBC, declined to comment, as did Guo Xiaoli, a Shenzhen-based spokeswoman at China Merchants Bank.

The price guidance was first imposed by the Ministry of Finance on Beijing-based ICBC, the people said. Merchants Bank was then urged by China's banking regulator to follow, one of the people said.

It is unclear whether Wing Lung's book value as of March 31 this year or Dec. 31, 2007 will be used for calculating offer prices, the people said. ICBC and Merchants Bank have used the end of 2007 book value as a reference for bids as it provides more room for higher offers, they said.

Wing Lung's equity fell 6.5 percent in the first quarter, to HK$11.67 billion ($1.5 billion).

Based on March 31 figures, the maximum valuation imposed would imply HK$143 per Wing Lung share, valuing the company at $4.25 billion. Using the bank's Dec. 31 book value would yield a price of HK$153 per share, or $4.55 billion. Wing Lung closed at HK$149.70 yesterday in Hong Kong. The stock had surged 57 percent this year before today, the best performer on the 201-company Hang Seng Composite Index.

CCB Drops Out

Wing Lung, founded in 1933 with initial capital of $5,700, has 35 branches in Hong Kong and $12 billion of assets. On April 30, the bank reported a first-quarter loss after writing off $61 million of investments in structured investment vehicles and collateralized debt obligations.

The family of Chairman Michael Wu, seeking to sell a 53 percent stake, had sought at least three times book value, people with direct knowledge of the matter said earlier. Hong Kong's 18 publicly traded banks are valued at an average 2.45 times book value, according to data compiled by Bloomberg.

Merchants Bank was picked as the preferred bidder for Wing Lung Bank last week after offering the highest price, people familiar with the matter said at the time. ICBC said in a May 23 statement that it offered a ``reasonable price'' for Wing Lung after conducting due diligence. It didn't say whether the bid was accepted or rejected.

Australia & New Zealand Banking Group Ltd. was one of the three banks selected in April to make final bids for Wing Lung, people familiar with the matter said last month. China Construction Bank Corp., the country's second-biggest, dropped out of bidding in April, saying the price was too high.

Past Lessons

China's decision to cap bidding prices suggests growing unease that the nation's banks, flush with cash from stock sales and rising profits, will squander money as they expand overseas.

``The government is concerned about Chinese banks overpaying for acquisitions,'' said Samuel Chen, a Hong Kong-based analyst at JPMorgan Chase & Co. ``Obviously, you have some lessons in the past.''

ICBC, the world's largest bank by market value, agreed in August last year to buy almost 80 percent of Macau's Seng Heng Bank for 4.68 billion patacas ($582 million), equivalent to 3.2 times the target's book value as of June 2007.

China blocked state-owned China Development Bank's attempt to bid for a stake in Citigroup Inc. in January on concern about the U.S. bank's losses related to the subprime mortgage meltdown, a person familiar with the matter said.