THE CHINESE Government has, for the first time, allowed a foreign investor to buy into a Chinese airline, with the approval of a 25% share sale in Hainan Airlines to American Aviation Investment, a fund led by US financier George Soros.

According to the official Xinhua news agency, the $25 million deal has now been approved by the Civil Aviation Administration of China (CAAC) and the Ministry of Foreign Trade and Economic Co-operation, despite initial signs that the agreement might be blocked.

While China has approved other aviation-related foreign investments, such as in maintenance sites, it has stalled on the issue of joint-venture airlines. Earlier guidelines allowing the sale of up to 25% of voting stock to overseas investors had met with resistance from within the CAAC.

Hainan Airlines has already established a joint venture to develop and market a travel-reservation system with Phoenix Information Services, a group controlled by Soros, which also owns an interest in the American Aviation Investment.

The six-year-old domestic airline is one of China's financially more successful carriers, making a profit in 1994 of $5.4 million. The company operates a fleet of eight aircraft, including five-leased Boeing 737-300s, from its base in China's most southern island province.

Hainan Island is one of China's original special economic zones and, as such, has been given a high degree of financial autonomy to develop. The southern-Chinese island has major potential as a tourist resort and is attracting a large amount of investment.

"George Soros has come in early and got a good deal. All the problems of infrastructure have been, or will be, solved. He may then have the only game in town," says aviation consultant Jim Eckes.

Observers are looking to the Hainan deal as a possible indication that the CAAC may now proceed with the long-awaited flotation of the larger China Southern and China Eastern Airlines on the New York stock exchange. Some analysts, however, are warning that Chinese airline accounting might not yet be ready for the US stock market.

Source: Flight International