By Heng Xie and Clare Baldwin

State-run China Development Bank (CDB) has expressed concern over the funding behind the effort of Thailand's CP Group to buy HSBC's stake in Ping An Insurance, sources told Reuters, a stance that may scupper the $9.4 billion deal.

The collapse of the deal, Asia's second-biggest M&A transaction announced last year, would be a huge blow for HSBC Holdings Plc. The bank said in December it stood to reap a post-tax gain of $2.6 billion from the sale that forms part of its plan to rid itself of non-core assets.

"Indeed, there are some problems," said one of the sources, referring to CDB's role in the sale. The sources were not authorized to speak publicly on the matter.

CDB's concerns follow reports in Chinese media, including the respected magazine Caixin Century Weekly, concerning the involvement in the deal's funding of mainland businessman Xiao Jianhua and former Thai Prime Minister Thaksin Shinawatra.

Caixin reported on December 25th that while the payment for the first stage of the deal was wired from a CP Group bank account, per the terms of the deal, the money behind that payment in fact came from external sources.

One third of the cash was provided by former Thai Prime Minister Thaksin Shinawatra, while the remaining two thirds came from companies controlled by Xiao, the magazine reported.

It is these revelations that have given CDB cold feet, the South China Morning Post reported on Tuesday, citing unidentified sources including one who said that the CP-CDB talks have been "de facto halted".

A spokesperson for CP Group told Reuters that they had seen the SCMP's report, but had no further comment beyond a previous statement which said that the acquisition of the Ping An shares had been legally conducted by four wholly owned subsidiaries using "legal capital from the Charoen Pokphand Group and its subsidiaries."

Late last year, HSBC agreed to sell its 15.6 percent stake in Ping An Insurance (Group) Co of China Ltd to CP for HK$59 per share. The bank said in a December 5 statement the sale of its stake in the world's second-largest life insurer by market value would be completed in two stages.

About one-fifth of the holding was to be transferred to the Thais on December 7.

CP, controlled by Thailand's richest man Dhanin Chearavanont, said it will purchase the shares through four British Virgin Islands companies - All Gain Trading Ltd, Bloom Fortune Group Ltd, Business Fortune Holdings Ltd and Easy Boom Developments Ltd - which it said are fully-owned subsidiaries.

The rest of the purchase is financed by the Hong Kong branch of CDB, and is subject to approval by the China Insurance Regulatory Commission (CIRC), HSBC said at the time.

Late last month, the media reports in China and Hong Kong said the first CP payment came from Xiao and Thaksin, as opposed to wholly-owned CP subsidiaries as agreed previously.

If CDB decides to withdraw its funding support for the deal, CP would have to scramble to find another large lender to back the acquisition quickly following the CIRC approval due February 1.

CP, whose core food businesses are poultry and animal feed, HSBC and Ping An declined to comment.

Ping An's Shanghai-listed shares dropped 3.73 percent to 45.47 yuan in mid-afternoon trading on Tuesday, while its Hong Kong shares fell 4.37 percent to HK$67.90.

INTERESTS IN CHINA

Dhanin - worth $9 billion according to Forbes magazine - already has major business interests in China ranging from agriculture to retail to auto manufacturing.

CP was the first multinational to invest in China's agri-business in 1979, and under Beijing's latest five-year plan, it was tasked with helping to modernize the Chinese farm sector. It also operates Lotus supermarkets in Shanghai, according to the company's website.

The Ping An sale, given its size, is an important and sensitive deal for HSBC, which spent $1.7 billion building its stake in the Chinese insurer between 2002 and 2005.

Ping An has seized headlines since late last year, following a series of reports by the New York Times.

One report in October, citing corporate and regulatory records, said the family of China's outgoing Premier Wen Jiabao had amassed $2.7 billion in wealth at one point, the biggest source of which came through stakes in Ping An.

Wen, who went on a state-visit to Thailand at the end of November, is due to step down as premier in March.

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