March 22 (Bloomberg) -- China Railway Construction Corp. hired Citic Securities Co., Citigroup Inc. and Macquarie Bank Ltd. to prepare it for a $2 billion initial public offering, said three people with direct knowledge of the decision.

The former railway arm of the People's Liberation Army may sell shares in Shanghai and Hong Kong as early as by year-end, said two of the people, declining to be identified before an official announcement. No final decision has been made on the size and venue of the offering, they said.

China Railway Construction is seeking funds to help it compete for contracts as the government expands underdeveloped transport networks. Bigger rival China Railway Engineering Group Co. is planning a $1.5 billion IPO, people familiar with the deal said in January.

``Capital is a key element in this industry,'' said Jimmy Lam, a Hong Kong-based analyst at BOC International Holdings Ltd. ``The government has to consider whether contractors have the ability to carry out large projects.''

The Chinese government may spend 1.25 trillion yuan ($162 billion) to build 17,000 kilometers (10,565 miles) of new railway lines in the five years to 2010, according to a November report by UBS AG. The expansion is part of a plan to invest 3.8 trillion yuan in China's overall transportation network.

China's length of railways per capita is a quarter of the world average, a ratio trailing that of India, the UBS report said. Its existing rail links are the busiest in the world by the ratio of freight volume to total length of railways.

Share Sales Encouraged

China Railway Construction has designed three-fifths of the country's rail network, building more than 32,000 kilometers of railroads, its Web site says.

An official at the Beijing headquarters of China Railway Construction, who declined to give his name, said the company has yet to complete its IPO plan. He referred further enquiries to a spokesperson surnamed Qian, who is traveling.

Tan Ning, board secretary of Citic Securities in Beijing; Lotte Pang, a Hong Kong-based spokeswoman at Macquarie; and Richard Tesvich, a spokesman at Citigroup in Hong Kong, declined to comment.

China's securities regulator is encouraging large state- owned companies to sell shares in Shanghai, a market that is only open to domestic buyers and select foreign investors. The nation in 2006 ended a one-year ban on stock sales, ushering in a 160 percent rally in the benchmark Shanghai and Shenzhen 300 Index in the past year.

Stock Sale Frenzy

Companies have sold $10.4 billion of stock on the mainland this year -- almost half the $24.4 billion raised in all of 2006. Industrial Bank Co. in February raised $2 billion in a Shanghai IPO that attracted record bids from Chinese investors. That same month, Ping An Insurance (Group) Co. sold $5 billion of stock on the city's exchange.

The company, which was the railway construction unit of the Chinese military until 1984, also builds roads, airports and hydropower projects in addition to railways, bridges and underground rail links, its Web site says.

Pretax profit jumped 26 percent in 2005 to 5.1 billion yuan on sales of 115.8 billion yuan, according to the latest figures available.

China Railway Construction received about 200 billion yuan of contacts in 2005, up 37 percent from the previous year, according to the latest figures available. About 35 percent of total orders were for railway projects, with road contracts accounting for a similar share.

Shares in China Communications Construction Co. Ltd., the nation's largest port builder, have doubled since its $2.37 billion Hong Kong IPO in December, compared with a 4.4 percent gain in the city's benchmark Hang Seng Index.

To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net.

Last Updated: March 22, 2007 04:04 EDT