(Recasts, adds details, analyst and trade comments)
* China has been reining in credit growth in its economy
* Imports to slump from August to October
* Shandong Changhua Food says restarts edible oil imports
* Local government offers hand to troubled buyer - trade
By Niu Shuping and Fayen Wong
BEIJING, Aug 28 (Reuters) - China's imports of palm oil will remain below average as tight bank lending squeezes buyers' cash flow and, despite some relief on that front this week, the country's top importers say they will cut shipments in coming months.
China is the world's second-biggest importer of palm oil, shipping in about 6 million tonnes of the edible oil each year, about 15 percent of global trade. But tight credit has led to a spate of defaults and cancellations, which has hurt global prices.
The country's second-largest palm oil importer, Shandong Changhua Food Group, said on Thursday that some banks that had temporarily halted loans had resumed lending and its trading operations were returning to normal.
As a result, Changhua said in a statement, it had imported 250,000 tonnes of soybeans and 20,000 tonnes of edible oil this week and planned to ship in similar volumes next week.
Even so, Changhua, which brings in about a fifth of China's palm oil imports, said it intended to reduce its trading activities in future and focus on expanding production at its soybean crushing and edible oil facilities.
A trading manager from Yunnan Huijia Import and Export Co Ltd, China's biggest palm oil buyer, said it was also cutting imports due to tighter credit but declined to say by how much.
Trade sources said Changhua and other Chinese firms had cancelled some shipments and defaulted on four or five more last month, equivalent to about 50,000 tonnes of palm oil, because they could not make payments to suppliers.
The sources, who have direct dealings with Changhua, declined to be named because they were not authorised to talk to the media. Changhua, one of the biggest private enterprises in northern Shandong province, declined to comment on any default.
"Widening losses and higher down payments mean importers have very tight cash. If they were able to buy three shipments before, they will only have money for one now," said Cai Nengbin, general manager with edible oil industry consultant Shanghai Pansun Information and Technology Co Ltd.
Consultancy Shanghai JC Intelligence Co. Ltd estimates that imports of refined palm oil from August to October could shrink to the lowest level in four years, with August shipments seen down by as much as 40 percent from a normal month.
The slowdown in imports by China has weighed on the price of Malaysian palm oil, which hit its lowest in more than five years on Wednesday at 1,976 ringgit ($628) per tonne.
The government has put pressure on banks to curb lending and restrict commodity financing, where raw materials such as copper and sometimes palm oil are used as collateral to raise cash, which companies then put into higher-yielding investments.
Jitters over a metal financing scandal at Shandong's Qingdao Port, which has exposed Chinese and foreign lenders to more than $3 billion of potential losses, sparked a fresh credit squeeze from June that was acutely felt in the northern province, where bad loans were also climbing.
This has added to the stress in the palm oil sector.
"Banks have tightened credit to the buyers to reduce default risks. These Chinese firms have been incurring losses on their palm oil imports for years because local prices have been consistently lower than imported price," said a trader in the palm oil business.
In the first half of the year, higher Chinese palm oil imports combined with greater price competition from rival soyoil meant Chinese companies had to sell palm oil at a bigger loss, more than 15 percent of the import cost at times, making the financing trade even riskier.
Two industry sources said the Shandong government had persuaded local banks to resume lending to Changhua, a family-owned enterprise that ranks among the 10 largest private firms in the province.
"The government is stepping in to help ... A collapse of the company may have a domino effect and affect the banking system," said Pansun's Cai. "But credit is still tight and it will take time for the trading companies to recover."
The Shandong government could not be reached for comment.
(1 US dollar = 6.1470 yuan) (1 US dollar = 3.146 Malaysian ringgit) (Additional reporting by Anuradha Raghu in Kuala Lumpur; Editing by Alan Raybould)