A statement by the State Council saying key Chinese equipment makers should be controlled by domestic firms may hinder the Carlyle Group's planned takeover of Xugong Group Construction Machinery Co Ltd, the nation's biggest maker of building machinery.

"Big and important equipment producers must seek the opinions of relevant departments at the State Council if they want to sell stakes to foreign investors," the State Council said in the statement.

"China encourages restructuring of such companies on the basis that the country maintains a controlling stake," it said.

The statement did not name any specific company and the Carlyle Group declined to make a comment.

According to the statement, China will speed up research into, and the manufacture of, big engineering machinery to meet the needs of railway, water, transport and other construction projects.

It did not mention road rollers, mobile cranes or compacting equipment, Xugong's three key products, said a spokesman with the firm who declined to be named.

But Guo Yaling, an analyst with Guosen Securities, said: "It is still hard to judge whether the deal will get the go-ahead from the government."

He said the statement would certainly have some impact on the deal.

Last October, the US private equity firm Carlyle Group agreed to buy 85 percent of Xugong for US$375 million, but the deal is still awaiting central government approval.

If it is approved, it will be the biggest-ever acquisition by a foreign investor of a leading State-owned company.

The takeover has raised concern that China is selling its strategic companies to foreign investors too cheaply.

Xugong is a leader in the industry and has the rights to many advanced technology patents.

Earlier this month, Chinese heavy machinery manufacturer Sany Corp said it wanted to buy Xugong and would pay 30 percent more than the Carlyle Group, according to Xiang Wenbo, Sany's executive president.

Xiang said it was not good for China's machinery industry to sell a big and important company like Xugong to a foreign firm.

According to Carlyle, there has yet to be a definitive agreement with Xugong on a purchase that was announced last October.

Since then both companies have continued to develop a strong relationship and are committed to the successful completion of the deal.

Shares of Xugong's publicly traded unit Xugong Science & Technology Co jumped by their 10 percent daily limit to 5.97 yuan (74 US cents) on the Shenzhen Stock Exchange on speculation that rejection of the deal will allow Sany to table a higher offer.

Sany Heavy shares rose 5 percent to 13.80 yuan (US$1.72) on the Shanghai Stock Exchange yesterday. Its shares have more than doubled this year.

(China Daily June 30, 2006)