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UPDATE 1-China SUV carmaker Zotye to sell $106 mln stake

* Zotye Auto to sell 20-30% stake for $106 mln

* SND Ventures-led consortium to complete the deal soon

* Shanghai IPO planned after private fund-raising (Adds quotes, details and background)

SHANGHAI/HONG KONG, May 5 (Reuters) - Zotye Auto, a Chinese maker of sport utility vehicles (SUV), is raising about 720 million yuan ($106 million) by selling a 20 to 30 percent stake to a private equity fund-led consortium, aiming for a Shanghai initial public offering later, sources said on Tuesday.

Zotye planned to sell shares to a group of investors led by SND Ventures Group, a Chinese private equity firm backed by the Suzhou government in eastern China, said the sources with direct knowledge of the matter.

The deal was expected to be completed later this month, said a Zotye executive who declined to be identified as he was not authorised to speak to the media.

The Zotye executive declined to comment further, while the sources also declined to be identified before an official announcement is made.

“The landscapes of the auto industry in the United States and China are totally different,” said one of the sources who looked at the deal but walked away.

“Chinese consumers are just starting to buy cars, while Americans may think about their second or third cars, which is not necessary when your budget is tight in the financial crisis,” he added.

Some foreign funds had approached Zotye but the Chinese carmaker had declined, the sources said.

SND Ventures was established in 2008 with strong support from the Suzhou government, and it aimed to manage 5 billion yuan in the next two years, according to Chinese media reports.

LOCAL ADVANTAGE

China is encouraging local governments to develop yuan-denominated investment funds to support key local industries and companies, in which foreign funds like The Carlyle Group [CYL.UL] have also tried to take stakes.

Local funds often win approval for deals more easily than foreign investors, which attract concern from some Chinese officials that foreign investment in strategically sensitive sectors may have an impact on national security.

Zotye and its domestic peers such as Geely Automobile Holdings Ltd 0175.HK and Great Wall Motor Co Ltd 2333.HK are benefiting from government stimulus measures and the country's fast-growing middle class.

Meanwhile, foreign rivals including General Motor Corp GM.N, Ford Motor Co F.N and Chrysler are struggling to survive amid the global financial crisis.

China overtook the United States as the world’s largest vehicle market this year and its top carmakers projected sales growth of up to 10 percent in 2009, making the country the only bright spot among major car markets.

Zotye, based in China’s eastern Zhejiang province, plans to make and sell 500,000 vehicles by 2012, aiming to double that capacity by 2017, according to its Web site. (US$1=6.819 Yuan)

Editing by Chris Lewis

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