* China targets capacity cuts in sectors such as steel, coal
* Liabilities for 6 such sectors 10 trln yuan in 2015 -UBS
* Coal and steel industry key to some local governments and banks
* Beijing wants banks to cut lending to overcapacity sectors
* Local governments urging banks to keep lending
By Shu Zhang and Matthew Miller
BEIJING, July 15 (Reuters) - China's provinces are pushing back against Beijing's efforts to restrict credit to loss-making enterprises with excess capacity, and are enlisting the support of local bankers to keep financing the targeted sectors, such as steel and coal.
As part of China's economic efficiency goals, the State Council earlier this year set capacity reduction targets for regional and central government enterprises in such sectors, and China's banks have been ordered to slash lending to loss-making and delinquent corporate borrowers.
But local governments in China's rust belt have been singing from a different hymn sheet in documents and speeches urging local lenders to keep funding firms central to the regional economy.
In Shanxi province, China's top coal producing region, the government told financial institutions to maintain coal sector lending at least at last year's levels, increase awareness of the industry's "pillar and strategic status" and not recall loans to seven local government-owned coal groups, according to a document released on the government's website in May.
Shanxi's deputy governor Wang Yixin told banks at an industry event on Wednesday that it was in their mutual interest to support the seven, which at the end of 2015 reported total liabilities of more than 1 trillion yuan ($150 billion) and an average liability-to-asset ratio of about 83 percent, according to Reuters calculations.
"What Shanxi's good coal companies need the most right now is the confidence of investors and the help from financial institutions - as we cross the river on the same boat," Wang said, and urged banks to roll over the companies' loans and buy their bonds.
Three senior executives at China's top coal producers all said they could secure loans at a rate equal to or lower than the central bank's benchmark rate, suggesting banks were lending a sympathetic ear to that call.
"In China, the most important thing is stability," said a manager at the Shanxi branch of one of China's big four state-owned asset management companies that help banks dispose distressed loans.
He said banks had nothing to fear in lending to such state-owned companies and were not about to treat the coal companies' debts as non-performing.
"Actually, some of those loans are already non-performing, but banks can arrange new loans to repay old loans and interest," he said.
In Henan the provincial government has asked local bankers to help companies in coal, steel, metals and construction materials to switch industry classification so they don't fall into categories covered by lending restrictions set by banks' headquarters, according to a document published on the Henan government's website in May.
The document urged locally headquartered financial services companies, including Zhongyuan Bank, Bank of Zhengzhou and rural commercial banks, to demonstrate their support for local companies.
Zhongyuan Bank and Bank of Zhengzhou didn't respond to requests for comment.
At the end of June the Shandong government in eastern China warned lenders in a document on its website that they would be "denounced" or "sanctioned" by creditors' committees and China's banking association if they unilaterally recalled loans to key borrowers.
The China Banking Regulatory Commission (CBRC) did not immediately respond to requests for comment.
Beijing has noticed the footdragging.
"Some regions' determination to remove over-capacity is shaky," Xu Shaoshi, head of the National Development and Reform Commission, China's top economic planning body, was quoted by state media as saying last week.
"The practical problem is that some regions are under big economic downward pressure and face difficult fiscal income and employment situations," Xu said on a teleconference that aimed to urge local leaders to cut over-capacity.
Total liabilities for six over-capacity sectors amounted to 10 trillion yuan in 2015, including 4.9 trillion yuan in bank loans and 3.8 trillion yuan in shadow credit, according to UBS research.
China's banking regulator has given lenders some latitude to manage their lending to over-capacity industries.
"It doesn't mean there will absolutely be no new loans to the coal industry," an official from the CBRC said.
"Banks can decide for themselves from a risk management perspective how to change their loan structure, after taking into consideration the central government's policy and local government arrangements," the official said.
That is proving a difficult balancing act.
Last Wednesday, Hebei province, home to a quarter of China's steel manufacturing, renewed its pledge to meet steel and coal reduction targets for 2016 following a central government environmental inspection, according to a notice on the province's website.
Just two weeks earlier, provincial party secretary Zhao Kezhi praised Yi Huiman, chairman of Industrial and Commercial Bank Ltd , the country's biggest bank, for "thinking from the big picture" by strengthening lending to the heavily industrialised region, state media reported.
"Those outdated steel mills, local governments and local banks are lingering in the last gasp," said Xu Zhongbo, head of Beijing Metal Consulting, which advises Chinese steel mills, adding that they were doing all they could to delay the capacity cuts.
"They live or die together," he said. ($1 = 6.6897 Chinese yuan renminbi) (Reporting By Shu Zhang and Matthew Miller; Editing by Will Waterman)