Taiwan will further scrutinize American International Group's stalled $2.2 billion sale of its Nan Shan Life unit, and may decide on its fate before the end of June.

The deal, a test case for the potentially lucrative financial sector merger and acquisition market between former political foes China and Taiwan, has been held up by concerns in Taiwan the buyers are backed by Chinese money, which is currently prohibited for the island's financial sector.

While the latest delay was not seen as good for Nan Shan's 4 million policyholders, it may have a lesser impact on AIG, which has recently struck two big deals as it sells assets to repay its $182.3 billion U.S. taxpayer-funded bailout.

It would be to the benefit of Nan Shan policy holders and employees if this decision could be made before the end of June. The delay in finalizing this arrangement may already have had some negative impacts, said Wenli Yuan, senior analyst with Celent, a financial industry research and advisory firm.

From an AIG global perspective the Nan Shan deal must now rate as a lower priority after recent announced deals with Prudential and Metlife.

AIG agreed to sell its Asian life insurance arm, American International Assurance, to Britain's Prudential Plc for $35.5 billion. This week, it sealed a deal to sell its American Life Insurance Co unit to MetLife Inc for $15.5 billion.

ROUGH WATERS

AIG and buyers China Strategic and Hong Kong-based fund Primus Financial had originally agreed a mid-July deadline for getting government approval for the Nan Shan sale. However the deal has faced rough waters amid concern in Taiwan the buyers are backed by Chinese money.

China Strategic shares fell 7.4 percent to end at HK$0.64 in Hong Kong on Thursday, trailing the Hang Seng Index's .HSI 0.1 percent gain. More than 500 million China Strategic shares changed hands, nearly thrice the 90-day average.

While relations between Taiwan and China, political foes for decades, have improved and the two have signed a financial services pact, Taiwan remains reluctant to fully open industries such as financial services to Chinese investors.

The reluctance stems from concerns that China, which views Taiwan as a renegade province that must be reunified with the mainland, could use its financial muscle to push its political agenda.

The buyers have said that Chinese money is not involved, but Taiwanese officials remain unconvinced. The sensitivity of the deal was such that Taiwan's parliament took the rare step of discussing it.

Taiwan's administrative deputy minister of economic affairs, Hwang Jung-Chiou, told lawmakers preliminary findings showed that China Strategic's major shareholders hold Hong Kong or British passports and no mainland Chinese passports. But he said the ministry's Investment Commission will check overseas to see if any funding is from China.

Primus declined to comment, while a Nan Shan official said it believed regulators would make a decision in the best interest of policyholders and employees.

Some 200 Nan Shan employees gathered outside parliament on Thursday, holding up signs urging the government to protect their jobs and the company, with some protesting the involvement of Chinese money.

Joyce Huang, a Taiwan-based financial institutions analyst for Fitch, said that should the deal be blocked, AIG would have several options, including retaining Nan Shan or pursuing an IPO. In the end, however, she expects that AIG will sell.

AIG is under pressure to dispose assets. So I do think they are likely to sell, at some point, to a strategic buyer, especially in a market like Taiwan, which is not as attractive as it once was in the past, she said.

Separately, Sean Chen, chairman of the FSC, told reporters at the hearing that the regulator would watch the track record of the buyers to make sure they are not stock speculators.

The buyers' track records are also important, such as if they are stock speculators, Chen said.

(Additional reporting by Rachel Lee in TAIPEI and Michael Flaherty and Denny Thomas in HONG KONG; Editing by Jonathan Standing and Muralikumar Anantharaman)

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