Shanghai Industrial Investment (Holdings) Co (SIIC) is suing the Hong Kong investment arm of the Fuzhou municipal government for $18.18 million. SIIC's wholly-owned finance arm, SIIC Finance, yesterday filed a High Court writ against Hua Rong (Holdings) and its subsidiary Hua Rong Finance. The writ seeks principal of $17 million and $1.18 million accrued interest from Hua Rong (Holdings) as guarantor and its subsidiary as borrower. The move by SIIC, an arm of the Shanghai municipal government, to take legal action against another municipal government arm could trigger a chain reaction among other creditors. A foreign bank official said: 'What we fear most is that we haven't made a move yet against the mainland companies but the mainland-based entities have already decided to take action against their counterparts.' His bank had not yet taken legal action against Hua Rong, which had failed to make interest and principal payments on a short-term loan worth tens of millions of dollars. It is believed Hua Rong (Holdings) is having difficulties repaying other loans. The company is mainly involved in finance, real estate, trading and fund-raising for projects in Fuzhou and Fujian. Hua Rong's problem was that it had few assets and had relied on short-term financing for long-term investments, the banker said. The firm was quite small with estimated assets of about $1 billion or so, he said. A source close to SIIC said the legal action was a commercial decision after failed attempts to recover the amount due through other channels. SIIC Finance had sent letters to both in November demanding repayment of the loan and interest. He said SIIC Finance was not related to listed Shanghai Industrial Holdings. 'It's a finance arm of the group mainly used to handle inter-company deals. Non-SIIC business to other mainland companies only accounts for 2 to 3 per cent of its total business,' he said. 'The loan is a normal commercial loan with security and guarantee.' Hong Kong Association of Banks chairman and Bank of China general manager Liu Jinbao again called for banks to support mainland companies as not all were poorly-run. News of the financial woes at Hua Rong come after Fujian Enterprises (Holdings) and Fujian International Trust and Investment were found to have defaulted on loan payments. Two other Hong Kong off-shoots of a Fujian provincial government-controlled company have been put into voluntary liquidation in recent months. Hua Rong, together with Fujian Enterprises, once considered obtaining a listing in Hong Kong.