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UPDATE 1-China to probe three banks in widening default inquiry

(Adds details, background)

SHANGHAI, Nov 19 (Reuters) - China widened its probe into last week’s shock bond default by a state-owned coal miner, saying on Thursday that three underwriting banks were suspected of misbehavior.

China’s interbank bond market regulator said in a statement it will launch investigations into Industrial Bank Co , China Everbright Bank and Zhongyuan Bank Co, which helped Yongcheng Coal & Electricity Holding Group issue bonds.

The National Association of Financial Market Institutional Investors (NAFMII) said Xigema Certified Public Accountants and China Chengxin International Credit Rating Co are also suspected of violating rules.

Yongcheng defaulted on a 1 billion yuan ($151.84 million) bond on Nov. 10, just weeks after it sold fresh debt, sparking a selloff in China’s corporate debt market.

The market jitters heighten funding costs for many corporate borrowers, threatening China’s nascent economic recovery.

The fresh probe comes a day after NAFMMI threatened to sanction Haitong securities, saying the brokerage was suspected of facilitating illegal issuance of bonds by Yongcheng Coal, and of manipulating the market.

NAFMII, a self-regulatory body under the People’s Bank of China, announced a “self-disciplinary” investigation into Yongcheng on Nov. 12, immediately after its default.

The companies named by NAFMII could not be immediately reached for comment.

Several high-profile defaults recently by Chinese state firms, including Huachen Auto Group Holdings Co and Tsinghua Unigroup, sent shockwaves across China’s corporate bond market.

Investors rushed to sell bonds issued by companies in provinces seen as fiscally weak, such as Liaoning, Shanxi and Henan.

Seeking to soothe investor nerves, the deputy governor of Shanxi said on Wednesday state firms from the province would be able to meet repayment obligations on bonds which mature in the near term, pleading support from financial institutions.

$1 = 6.5859 Chinese yuan renminbi Reporting by Samuel Shen and Andrew Galbraith; Editing by Toby Chopra and Bernadette Baum

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