UPDATE 1-China rejects Tengzhong's Hummer bid -source


* Two sides may still try to salvage a deal -source

* Offshore vehicle possible alternative to buy Hummer -source (Adds details, background)

By Jiu Chakravorty and Fang Yan

NEW YORK/SHANGHAI, Feb 24 (Reuters) - Beijing has rejected a bid by an obscure Chinese industrial equipment maker to buy GM's [GM.UL] money-losing Hummer brand, dealing a possible death blow to the controversial deal as both sides race to salvage it.

Sichuan Tengzhong Heavy Industrial Machinery Co, based in China's Sichuan province, was believed to be lobbying behind the scenes for regulatory approval ahead of an end-February deadline to close the deal.

Officials at the Ministry of Commerce, which must approve the deal in China, had said repeatedly in recent weeks that they had yet to receive any formal application from Tengzhong. Wang Chao, an assistant commerce minister, reiterated at a briefing on Wednesday that the ministry had yet to receive an application.

A source close to the companies told Reuters on Wednesday the government had rejected the deal, but that Tengzhong and GM were still looking at alternatives.

Another source close to the companies told Reuters on Tuesday that Tengzhong could use an offshore vehicle to acquire Hummer, which would allow it to skirt Chinese regulations. [ID:nTOE61M045]

"I am not surprised that Tengzhong failed to get government approval to buy a gas-guzzling brand like Hummer," said Li Mengtao, an analyst with Sinolink Securities.

"Even if it can finally get its hands on Hummer through an overseas vehicle, it still needs Beijing's approval to either sell or make Hummer in China. I just don't get it why Tengzhong is so keen to get the deal down if it is denied access to the China market."

The deal was announced with fanfare last year, symbolising China's move onto the world stage as the global auto industry underwent a wrenching restructuring during the global recession.

But the tone quickly turned negative at home for Tengzhong, with many questioning the wisdom of letting an obscure heavy machinery maker with no experience running a foreign company buy a struggling international company like Hummer.

Many also said that regulators might balk at letting a Chinese firm acquire a U.S. brand known for making gas guzzling vehicles at a time when China was stressing the development of more environmentally friendly technologies.

Word that the deal might be running into trouble first began to trickle out in January, when the companies extended for a month their initial deadline to close the deal. [ID:nTOE612083] (Additional reporting by Doug Young; Editing by Jacqueline Wong)



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