BOC underwrote two one-year bill issues totalling 4 billion yuan (HK$3.9 billion) by Shanghai Electric, parent of Hong Kong-listed Shanghai Electric Group (2727), last November and March this year.

Three officials at the listed unit, China's largest power gear maker, have been detained for questioning in a scandal involving suspected misuse of Shanghai's social security funds.

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They are former chairman Wang Chengming, executive director Han Guozhang and non-executive director Zhang Rongkun.

"After the events occurred, our bank immediately contacted Shanghai Electric's rating firm, urging it to start to monitor the issuer to help protect investors' interest," BOC said.

"Our bank will continue to follow developments, closely watching Shanghai Electric's operations and disclosing related information in a timely manner," it said.

An official at the bank declined to comment Wednesday.

The yield on Shanghai Electric's 2006 bills, traded on China's interbank market, had risen to 3.22 percent Wednesday from 2.2536 percent on August 9, when a local ratings agency put the paper under review. The yield went as high as 4.1139 percent on August 18. The 2005 bills have not traded since August 9.

The rating firm, Shanghai Brilliance Credit and Investors Services, has not changed its high rating of A-1 plus, which means the firm has a strong ability to redeem the debt.

State media have said the scandal has implicated the director of the Shanghai Municipal Labor and Social Security Bureau, Zhu Junyi, who is suspected of impropriety involving a 3.2 billion yuan loan of city funds to toll road operator Fuxi Investment Holding.

Fuxi is another issuer in China's 15-month-old short-term corporate bill market. Fuxi's chairman is Zhang Rongkun.

Fuxi, which had its credit rating slashed this month due to the scandal, is due to redeem 1 billion yuan in one- year bills next March. Any default by Fuxi would be the first in the bill market's history and could hit sentiment towards other issuers.

The lead underwriter of the Fuxi bills, Industrial and Commercial Bank of China, has sought to reassure the market over the past two weeks.

In its latest statement Wednesday, the country's biggest lender said it would set up a committee to protect the interests of investors.

Banking sources said that it was discussing the possibility of redeeming Fuxi's bills early.

Fuxi and Shanghai Electric have said their businesses are operating normally.

REUTERS