Recent high-level signals from Beijing suggest the Chinese authorities are backing away from a policy which clears the way for foreign investment in airlines and are directly contradicting plans for foreign stock market listings for China's three main carriers.

In late October, Civil Aviation Administration of China's deputy director Bao Peide denied that foreigners were allowed to invest in the 'core aviation business', adding that stakes could only be taken in Chinese airports and related aviation projects on the rationale that 'all countries restricted foreign investment in aviation,' according to China's official Xinhua News Agency.

The change in tack was confirmed by Gan Ziyu, vice minister of the State Planning Commission, who listed aviation-related sectors open to foreign investment, including airports, terminals and maintenance, but excluded airlines.

Any ban on foreign invest- ment in Chinese airlines would represent a major retreat from CAAC guidelines released in early 1994. These permitted foreign parties to take up to 35 per cent of the equity in an airline with voting rights capped at 25 per cent. Since then there has been no suggestion that Beijing was uncomfortable with these limits or that it was considering any change. In fact, the much-vaunted plans for foreign initial public offerings by China Eastern and China Southern Airlines, followed by flag-carrier Air China, would presuppose just such a policy.

Several reasons may explain these apparent contradictions. First, Bao's statement was made in the context of the proposal by US financier George Soros to buy a 25 per cent stake in Hainan Airlines. Bao declined to comment specifically on the proposal, to avoid directly criticising the economic policies of Hainan province - an economic zone with a high degree of autonomy, it has already approved the proposed investment.

China's special economic zones have become especially sensitive about perceived central government interference since Beijing recently ruled to phase out their tax preferences. The CAAC has not always won past showdowns. Last year Hainan Airlines sold shares locally without Beijing's approval.

But Soros has apparently interpreted Bao's statement as an official rejection of his plans. Instead he has now offered to invest $25 million in Hainan's reservation system, and Bao has reportedly approved this proposal.

Another reason could be that the CAAC wants foreign investment in airlines to follow a planned sequence, starting with the IPOs pending for the three leading carriers which have repeatedly been labelled 'test cases'. The least likely explanation is that the CAAC is retreating from its earlier guidelines. If so, this will be a surprise to the management of China's big three.

David Knibb

Source: Airline Business