HONG KONG (Reuters) - KKR & Co (>> KKR & Co. L.P.) and BlackRock Inc (>> BlackRock, Inc.) are among leading global investors in talks to buy a stake in China Huarong Asset Management Co Ltd as the bad debt manager seeks to raise more than $2 billion, people familiar with the matter told Reuters.

Other investors in the hunt include rival private equity firms Blackstone Group (>> The Blackstone Group L.P.) and Bain Capital, the people familiar with the matter said. Sovereign wealth funds from Asia and the Middle East are also in a group of 20 or so investors preparing to submit first-round offers by mid-February, they said.

Reuters previously reported that Huarong was planning to sell a stake of between 15-20 percent to strategic investors ahead of an eventual initial public offering. Overseeing total assets of 400.9 billion yuan ($66 billion), Huarong is the largest of China's four bad loan managers.

Huarong's planned stock offering will allow the company to raise money to expand its business - acquiring bad loans and forfeited assets from companies unable to repay their lenders. Huarong turns a profit by repackaging the loans and assets and selling them on.

As China's economy slows, a wave of loans is expected to turn sour. That will boost prospects for Huarong and the three other asset managers set up by the Chinese government in 1999 to remove an estimated 1.4 trillion yuan ($230 billion) worth of bad loans from the country's top four state lenders.

"NPLs (non-performing loans) will keep rising in absolute terms and relative to the loan base (in ratio terms) from less than 1 percent, which is low and unsustainable," said Grace Wu, a Daiwa Capital markets analyst.

"China has a large enough buffer to absorb a three-four times increase in NPLs. Some will argue that a lot of loans are rolled over in what is called 'evergreen loans' but that's the nature of lending in China," she added.

CINDA APPEAL

Huarong's fund-raising plans come on the heels of China Cinda Asset Management Co Ltd's (>> China Cinda Asset Management Co Ltd) $2.9 billion Hong Kong IPO in December. Cinda's stock has risen 43 percent above the offer price.

In an emailed statement late on Thursday, Huarong reported a slower, but still strong increase in net profit in 2013. It said it would be focusing its efforts this year on its planned share listing.

The company, which has said it wants to list by 2016 at the latest, said its net profit rose 45 percent to 10.07 billion yuan ($1.67 billion) in 2013. A year earlier, it grew 65 percent.

Huarong was set up in 1999 to manage the non-performing loans of Industrial and Commercial Bank of China Ltd (>> Industrial and Commercial Bank of China), the world's biggest bank by market value.

Controlled by China's finance ministry, Huarong was restructured into a joint stock financial holding group in 2012 in preparation for its own listing. China Life Insurance Co Ltd <2628.HK> (>> China Life Insurance Company Limited), the world's biggest insurer by market value, owns 1.6 percent of Huarong.

Cinda's IPO attracted some of the biggest names in global investing as cornerstone investors to provide a solid structure for its IPO. They included Oaktree Capital Management Ltd (>> Oaktree Capital Group LLC), the world's biggest distressed debt trader, and Och-Ziff Capital Management Group LLC (>> Och-Ziff Capital Management Group LLC), who were among the 10 cornerstone investors to jointly plough $1.1 billion into the offer.

Before the IPO, Cinda had raised $1.6 billion through a stake sale to investors including China's National Social Security Fund, Standard Chartered (>> Standard Chartered PLC) and UBS (>> UBS AG).

Blackstone, BlackRock, Bain and KKR declined to comment. A Huarong official said the company has been talking with investors, but has not selected any.

The sources declined to be identified as the process was private.

(Reporting by Stephen Aldred and Denny Thomas; Additional reporting by Xiaoyi Shao, Bi Xiaowen and Nishant Kumar and Umesh Desai; Editing by Michael Flaherty, Matt Driskill and Kenneth Maxwell)

By Stephen Aldred and Denny Thomas