Aug. 5 (Bloomberg) -- China Development Bank is competing with Commerzbank AG to buy Allianz SE's Dresdner Bank, Germany's third-largest lender by assets, three people familiar with the matter said.

China Development Bank, which funds the nation's public works projects, has conducted due diligence on Dresdner Bank in Frankfurt, said the people, who declined to be identified because they aren't permitted to publicly discuss the matter.

Dresdner Bank may fetch as much as 9 billion euros ($14 billion), according to Merck Finck & Co., making it the biggest overseas acquisition by a Chinese company. Spain's Banco Santander SA is also interested in Dresdner, which Allianz bought for 23.3 billion euros in 2001, the people said.

``There is potential for a political backlash'' if Dresdner is sold to a buyer outside of western Europe, said Tony Silverman, an analyst at Standard & Poor's Equity Research in London. ``The price would have to make up for the absence of strategic upside for Allianz in other deals.''

Chinese companies and funds spent $19.3 billion buying stakes in Blackstone Group LP, Morgan Stanley, Barclays Plc, Fortis and Johannesburg-based Standard Bank Group Ltd. since May 2007. Those investments are now worth about $7 billion less on paper, according to data compiled by Bloomberg.

China Development Bank has a paper loss of about $1.7 billion on its year-old investment in U.K. lender Barclays.

Dresdner Book Value

Commerzbank, Germany's second-biggest bank by assets, is the most likely buyer as it's already studied the company's books and held talks with management, the people said. Allianz gained 4.9 percent to 114.05 euros in Frankfurt trading.

Dresdner Bank spokesman Martin Halusa declined to comment. China Development Bank spokesman Xu Fei said he wasn't immediately able to comment. Commerzbank spokesman Maximilian Bicker declined to comment, as did a Banco Santander spokesperson.

Dresdner would give a buyer 500 billion euros of assets, more than 1,000 branches and 6.3 million retail clients. Allianz wants to sell the securities unit Dresdner Kleinwort, which has contributed to more than 2.5 billion euros of subprime-related writedowns in the past year.

The German bank may be worth 8 billion euros to 9 billion euros, said Konrad Becker, a Munich-based analyst at Merck Finck. Allianz Chief Financial Officer Helmut Perlet in May estimated Dresdner Bank's book value at about 12 billion euros.

Barclays Losses

China Development was initially interested in Dresdner's securities unit and is now looking at the entire bank, including the retail business, after valuations fell, the people said.

The Chinese bank paid $3.04 billion for about 3 percent of Barclays, the U.K.'s third-biggest lender, in July 2007. The investment was made to provide backing for Barclays' unsuccessful bid to acquire ABN Amro Holding NV. Since then, shares of Barclays have tumbled about 45 percent.

Industrial & Commercial Bank of China Ltd.'s $5.6 billion purchase of a stake in Standard Bank was the nation's biggest overseas acquisition of a bank to date.

China Development President Chen Yuan, 63, is seeking expertise in areas such as investment banking as he shifts focus away from lending for state projects. The bank received $20 billion in December from the government to help it catch up with rivals such as ICBC, the world's largest bank by market value.

Slow-Growth Bank

``It makes sense for China Development to continue looking overseas as it's trying to shift away from being a pure policy bank,'' said Jimmy Leung, financial services partner at PricewaterhouseCoopers in Shanghai. ``They'd still be keen if it's a bargain sale.''

China Development's profit rose 6.9 percent in 2007, about a 10th of the average pace among the nation's publicly traded lenders. The bank was forced to slow loan growth as China's government moved to curb inflation.

Even so, Standard & Poor's raised its long-term credit rating on China Development to A+ from A on July 31, following an upgrade of China's sovereign debt.

Allianz, Europe's biggest insurer, has dropped about 60 percent in Frankfurt trading since the Dresdner acquisition was announced on April 1, 2001, more than the 48 percent drop in the Bloomberg Europe 500 Insurance Index.

Dresdner Bank Woes

Dresdner Bank posted a 53 percent decline in net income last year, to 410 million euros. The investment bank, which is headed by Stefan Jentzsch, 47, and employs about 6,000 people, posted a 759 million-euro pretax loss in 2007 after writedowns. The unit was created from the merger of Dresdner Kleinwort and Bruce Wasserstein's Wasserstein Perella & Co.

Allianz Chief Executive Officer Michael Diekmann, 53, said in May talks are taking place about a possible sale or merger of the bank. Dresdner plans to separate its consumer and investment banking units by the end of the month to give it more options in finding partners, the insurer has said. Allianz could sell the securities unit separately, according to Silverman at S&P.

``You would have much lower synergies if you are a foreign bank looking at Dresdner, particularly in the retail bank,'' said Matthew Clark, a London-based analyst at Keefe, Bruyette & Woods. ``If a foreign company is prepared to pay a higher price it may be hard to block.''

The German government aims to adopt legislation this fall that would help fend off foreign investments deemed to pose a threat to national security, the Economy Ministry said. The draft law would provide legal instruments giving the government a veto over unwanted stakes in companies.

To contact the reporter on this story: Aaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net; Joyce Moullakis in London at jmoullakis@bloomberg.net

Last Updated: August 5, 2008 12:43 EDT