China Merchants Bank, the country's sixth-largest, will launch a $3.2 billion rights issue this week to bolster its balance sheet after a lending binge last year, sending its shares up 3 percent.

The bank's move is in line with domestic peers which are trying to replenish depleted capital bases after a 2009 lending spree and as China's regulators tighten capital rules.

Analysts said China Merchants' issue was generously priced and could serve as a pricing guide to other banks under pressure from regulators.

 "As the first of this round of fundraising, the bank's rights issue, which is seen as modestly priced, will serve as a guide to others," said Li Shanshan, analyst at BoCom International.

Last week, larger peer Bank of Communications, China's fifth-biggest lender by assets, said it planned to raise as much as 42 billion yuan ($6.15 billion) via a rights issue in Shanghai and Hong Kong.

Securities brokerages said another mid-sized lender in need of funds, Shanghai Pudong Development Bank, part-owned by Citigroup Inc, planned to raise about 40 billion yuan by selling a roughly 20 percent strategic stake to China Mobile.

Bank of China, the fourth-largest lender, has announced plans to issue as much as 40 billion yuan in six-year convertible bonds and analysts said mid-sized Hua Xia Bank was also likely to seek funds.

China's banks are rushing to raise funds after record lending of nearly 10 trillion yuan last year to support the government's economic stimulus and spur recovery in the world's third-largest economy, but regulators are now pressuring lenders to improve their finances, fearing a rise in bad loans.

Chinese newspapers have reported recently that Beijing may ask big banks to increase their capital adequacy ratio to 11.5 percent this year from an average 11 percent at present.

In a November report, BNP Paribas said China's listed banks would need to raise more than 300 billion yuan by selling shares or bonds in the next few years to shore up their balance sheets.

Expectations of a flood of new share issuance from banks have helped to weigh down China's share market, with the benchmark Shanghai Composite Index .SSEC slumping nearly 8 percent since news in late November about banks' plans for cash calls.

 China Merchants' shares rose in both Shanghai and Hong Kong on Tuesday after news of the rights issue launch, despite weakness in the broader markets, as investors welcomed the pricing and showed relief that all the news was out.

Its Hong Kong-listed H shares rose 3 percent to HK$20.40 in morning trade compared with a 0.6 percent drop in the benchmark Hang Seng Index .HSI, while in Shanghai its A shares rose 1.29 percent to 16.51 yuan while the benchmark fell 0.24 percent.

"We believe it's quite attractive," Guotai Junan said in a research note regarding the pricing of the offering.

GENEROUS ISSUE

The bank needs to boost its capital adequacy ratio, which was 10.54 percent as of Sept. 30 versus a 12-percent minimum for small and mid-sized lenders, after last year's loan surge. It is also absorbing a 2008 acquisition of Hong Kong's Wing Lung Bank.

The yuan-denominated Shanghai A-share rights issue would raise 18 billion yuan, while its Hong Kong-listed H-share rights issue would raise 4 billion yuan, the lender said in a statement.

China Merchants Bank set a generous A-share rights issue price of 8.85 yuan per share and said the H-share portion would be priced at the same level after exchange rate adjustments.

Based on the official yuan and Hong Kong dollar exchange rates on Monday, the H-share rights shares would be priced at HK$10.06 per share.

Still, ratings agency Fitch, which downgraded China Merchants in February, noted then that while the rights issue should bolster capitalisation considerably, even after this exercise core capital was likely to remain just on par with other Chinese peers rated as 'D' by the agency.