UPDATE 2-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
* China seen selectively approving overseas auto M&A (Adds details, quote)
By Jiu Chakravorty and Doug Young
NEW YORK/HONG KONG, 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, a source said, dealing a possible death blow to the controversial deal.
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 must approve all major foreign mergers and acquisitions in China, had said repeatedly in recent weeks that they had yet to receive any formal application from Tengzhong.
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.
Wang Chao, an assistant commerce minister, reiterated at a briefing on Wednesday that the ministry had yet to receive an application, and any reports that the agency had rejected the bid were untrue.
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]
But such a route could put Tengzhong at loggerheads with government agencies in Beijing, whose approval would be necessary to construct new manufacturing facilities proposed by Tengzhong and and even sell the vehicles in China.
"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 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 international experience buy a struggling foreign brand 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]
The deal's failure could underscore that China will be selective in deciding which deals to approve based on their commercial sense and whether they conform with Beijing's political agendas, and not only on competitive issues.
Beijing Automotive Industry Holding Corp (BAIC) won speedy approval late last year to purchase vehicle designs from GM's money-losing Saab unit, just weeks after a larger group that included BAIC failed to seal a deal to buy all of Saab.
Similarly, the regulator appears to support a separate bid by the parent of Hong Kong-listed Geely Automobile (0175.HK) to buy Ford's (F.N) Volvo unit, which would give the Chinese automaker valuable technology.
"I don't think the Hummer deal makes any sense for Tengzhong especially if it gets the deal done through a overseas vehicle," said Zhang Xin, an analyst with Guotai Junan Securities.
"It wasn't that good a deal in the first place as Tengzhong would only get the brand. But Geely could get both the technologies and the brand in the Volvo deal." (Additional reporting by Fang Yan in Shanghai and Aileen Wang in Beijing; Editing by Jacqueline Wong & Kazunori Takada)
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