New investment rules for China's cash-hungry airports

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China's aviation regulator announced this week it will raise limits on foreign investments in airports and airlines from August 1 2002 to attract more overseas investors into the sector

Instead of capping foreign stakes in airports at the current 49% and in airlines at 35%, the Civil Aviation Administration of China (CAAC) said it would only require Chinese shareholders to retain a "controlling interest" in the form of voting rights or other means.

Investors expect the deregulation to help reduce debts and boost efficiency. Those airports most likely to attract greater foreign interest are those with international connections because they could capitalise on duty-free shoppers. The CAAC also said it would scrap restrictions whereby only the Chinese partner could supply executives for the posts of chairman and president in a foreign-invested airport.

"The rules are issued to help us adapt to the new situation now that China has joined the World Trade Organisation and the aviation sector is deepening its reforms," the CAAC said in a statement. China joined the global trade body in December.

"Increasing the level of foreign investment will help encourage overseas investors to take part in the sector consolidation and lower debt ratios," CAAC policy department chief Yuan Yaohui said in the statement. China has also directed its fragmented airline industry to merge to create three globally competitive carriers: China Eastern Airlines, China Southern Airlines and Air China.

A recent report in Aviation Analyst Asia Pacific estimated that 90% of China's 143 airports lost money last year, mainly due to heavy debt burdens accumulated by rapid expansion and relatively poor revenues from retail concessions. Approximately 60% of China's airports are still managed directly by the CAAC with varying ownership structures including central, provincial and municipal governments.

Meanwhile Beijing Capital International Airport Co, backed by Aéroports de Paris, is likely to be a key investor and plans to acquire shares in Shenyang, Xi'an and Chengdu airports and up six others in which it has signed letters of intent to invest. China's passenger numbers continue to grow with domestic passenger traffic up 19.5% in 2001, international traffic up 7% and Hong Kong/Macau traffic up 7.7%.