UPDATE 2-China's Hengfeng Bank to raise 100 billion yuan in state-led rescue

* Unit of sovereign fund, local asset manager to take control of Hengfeng Bank

* UOB to have 3.3 bln shares in Hengfeng after the deal

* Deal size among the largest among rescues of smaller lenders (Adds financial details of the share sale in the lead, analyst quotes in paragraph 7, 8 and 12, details and background)

BEIJING, Dec 18 (Reuters) - China’s Hengfeng Bank will raise 100 billion yuan ($14.21 billion) through a share sale to state and foreign investors, as part of government efforts to support indebted smaller banks and contain financial risk.

The Shandong-based lender said in a Wednesday statement that it would issue 100 billion shares through a private placement.

Central Huijin Investment Ltd, an investment arm of country’s sovereign fund, China Investment Corp (CIC), will purchase 60 billion shares in the sale, and the local government-backed financial asset management firm will purchase 36 billion shares, according to the statement.

Singapore’s United Overseas Bank and other investors will purchase the remaining 4 billion shares, it added.

The lender did not provide financial details, but UOB, which had been Hengfeng’s second-largest shareholder, said in a separate statement that it would purchase 1.86 billion yuan in cash to purchase 1.86 billion more shares in Hengfeng, taking its holding in the lender to 3.3 billion shares.

UOB said the deal will help Hengfeng to raise a total 100 billion yuan via the capital increase.

Central Huijin and Shandong Financial Asset Management Co did not respond immediately to a request for comment.

The rescue is likely to be among the largest among the smaller lenders, which underpinning the severity of the risks facing Hengfeng, said Wang Yifeng, a senior analyst with Everbright Securities Co.

“Existing shareholders are required to take up the responsibility to absorb risks in such rescues,” Wang said.

The bank, based in the eastern Shandong province, has not released its annual report since 2017 due to management and liquidity issues.

The banking and insurance regulatory watchdog appointed its staff to head the bank back in 2017, but the restructuring process has been dragged since then.

Concerns over Hengfeng were rekindled by the state seizure of Baoshang Bank earlier this year, and the state rescue of Bank of Jinzhou, which sharpened concerns about the health of hundreds of small lenders as China’s economic growth slows to near 30-year lows.

“The lender has likely exhausted its capital and needs to expand its shareholder base,” said Liam Zhou, founder of Shanghai-based money manager Minority Asset Management (MAM). “It’s a move to defuse and prevent contagion risks.”

After the completion of share sale, Central Huijin and Shandong Financial Asset Management will become controlling shareholders of Hengfeng, according to UOB’s statement.

Before the share sale announcement, UOB told Reuters in June that it retained a 13% ownership in the Shandong lender.

The central bank did not respond to a request for comment on Wednesday, but said on Aug. 26 that liquidity at Hengfeng is ample and the bank is operating normally. ($1 = 7.0389 Chinese yuan renminbi) (Reporting by Cheng Leng, Ryan Woo in Beijing and Samuel Shen in Shanghai, Editing by Louise Heavens)