TRI, TELEKOM TO START MERGER TALKS State-controlled Telekom Malaysia <TLMM.KL> said it had asked cellular rival Technology Resources Industries <TRIB.KL> to begin merger talks, moving a step nearer to creating the country's biggest mobile group. Telekom, dominant in fixed lines but with a weak mobile unit that ranks fourth out of five, has battled for three months to take control of number two provider TRI to beef up its cellular arm.

--Japan to raise HITIC case with China's premier--

[LatelineNews: 2000-10-5] TOKYO - Japan plans to take the opportunity of next week's visit by Chinese Premier Zhu Rongji to demand an explanation for why a Chinese trust firm has failed to pay interest on a Samurai bond, a government source told Reuters on Thursday. The latest coupon payment delay by debt-ridden Hainan International Trust and Investment Corp (HITIC) and a series of problems involving other trust firms, or ITICs, have revived old fears about the credibility of China's financial institutions.

An official default announcement on HITIC's 14-billion-yen Samurai bond would be the first time a Chinese financial firm has failed in Japan's yen bond market and would make it almost impossible for others to tap the market again, analysts said.

The trust, owned by the government of the southern province of Hainan, missed a payment last Monday and has won central bank approval to file for bankruptcy.

"Japan is deeply concerned about the problems with the Chinese ITICs, including HITIC's overdue payment," the government source said. "We are treating this problem very seriously.

"We are considering raising this issue as an important individual item on the agenda in meetings with Zhu," he said.

Beijing's reluctance to play an active role in resolving the long-standing credibility problems has irked both Japanese financial institutions and the government, banking sources said.

Zhu will visit Japan between October 12 and 17, becoming the first Chinese premier to visit Japan since 1994.

Japan's lead commission banks announced in a newspaper notice last week that the People's Bank of China had ordered HITIC to halt all financial activities.

HITIC, a financial trust firm wholly owned by the provincial government of southern Hainan, was scheduled on September 25 to provide coupons to the holders of its 14 billion yen, 3.4 percent seven-year Samurai bond due to mature in September 2004.

Holders of the bonds had yet to receive the payment as of Wednesday and now increasingly doubt HITIC's ability to pay by the end of the 14-day grace period on October 9.

HITIC's other 14.5 billion yen seven-year Samurai due to mature in December 2001 went into de facto default on July 10 after payment was missed at the end of the 14-day grace period.

No official default was declared and the funds were finally made good on July 27.

"This issue appears to undermine the fundamental principles of a market economy, such as making payments on time or at least giving an explanation, and this could have a long-lasting effect," the government source said.

"We are concerned the problem could damage relationships between Japanese and Chinese financial institutions in the long term," he said.

Japan's embassy in Beijing has written to the People's Bank of China expressing uneasiness and urging the central bank to handle HITIC's problem with care. It has received scant response.

"We cannot predict how the problem will be settled," the government source said.

"We are not sure how China understands this problem," he said. "And the Japanese side has still been unable to meet Chinese officials to discuss the matter."

This is not the first time that Japan had made an attempt to bring up the issue of China's troubled financial firms.

Last year, then-Japanese prime minister Keizo Obuchi raised the issue when he visited China, saying serious problems loomed.

China replied that its priority was to restructure the ITICs rather than to resolve their problems with Japanese banks.

Many of the ITICs were formed in the late 1980s by provincial governments as a vehicle to raise foreign funds.

The collapse of Guangdong ITIC (GITIC) in late 1998 sparked a series of debt defaults at China's trust firms. GITIC at the time did not give priority to repaying its foreign debt.

The latest HITIC payment problem also comes as China is in the process of slashing the number of such trusts to about 40 or 50 from more than 200. Central bank governor Dai Xianglong said in July that HITIC might be closed down.

Banking sources said Japan's top banks have an estimated $1.5 billion to $2.0 billion in unrecoverable loans to the ITICs. Of that amount, about $200 million is exposed to HITIC.