SHANGHAI, Nov 13 (Reuters) - Chinese banks and fund managers are selling their holdings of bonds issued by state-owned firms after a spate of defaults raised concerns about broader creditworthiness, traders said on Friday.

Several traders and sources told Reuters state banks were reducing their exposure to debt issued by China's state-owned enterprises (SOEs), and some had been doing so for a while.

"Our risk control department has warned the whole group with a list of bond issuers as early as late August, several recently defaulted firms were all on the list," a banker at one of China's big four state banks said.

"If you don't respect market rules, you'll destroy the credibility of all regional governments."

While the indebtedness of China's state-owned sector has long been a worry, investors have also liked these bonds for their yields and the implicit guarantee of protection from provincial governments.

This week's selloff was triggered by news Yongcheng Coal & Electricity Holding Group Co Ltd had defaulted less than a month after issuing a new bond. Trading in bonds issued by state-backed integrated circuit maker Tsinghua Unigroup Ltd were also halted on the Shanghai Stock Exchange after they plunged following a debt warning by one of China's leading rating agencies.

The setbacks for Unigroup and Yongcheng came after the high-profile default on a bond payment at the end of October by Huachen Automotive Group Co Ltd, the state-backed parent of BMW's main Chinese joint venture partner.

A Tsinghua Unigroup 5.11% Jan 2024 putable bond finished down 7.5% on the day on Friday at 13 yuan, after a nearly 37% drop the day before. (Reporting by Winni Zhou and Andrew Galbraith in Shanghai, Cheng Leng in Beijing Writing by Vidya Ranganathan; Editing by Simon Cameron-Moore)