THE sale of a key stake in Hong Kong Dragon Airlines to the state-owned China National Aviation Corp (CNAC) is only weeks away. The mainland carrier is negotiating to buy up to 10 per cent of Dragonair from Cathay Pacific Airways and its majority owner, Swire Pacific. The deal would be valued at up to $350 million and was expected to be finalised within weeks, senior airline sources confirmed. Its value to Swire was much greater than dollars, they said, because it was being worked out in the hope the British hong's 52 per cent interest in Cathay, the territory's de facto flag carrier, could be secured after the 1997 handover to China. Swire and Cathay together control about 43 per cent of Dragonair. Top Swire executives from London are in Hong Kong and have been meeting officials from CNAC, controlled by the Civil Aviation Administration of China. Sir Adrian Swire is understood to be involved personally in the negotiations. The sources said there were three scenarios: Swire and Cathay each sells a stake, together totalling up to 10 per cent. Cathay alone sells part of its stake. New shares are issued to CNAC, diluting the value of the existing shares. The first scenario is tipped as the most likely. Cathay, Swire and Dragonair made no official comment last night, but Cathay managing director Rod Eddington said of the reports: 'I'll call that speculation.' CNAC put fear into Swire management in March by lodging an application to operate flights from the territory, and senior officials with CNAC later said China wanted to set up a locally-based airline to compete with Cathay. Many analysts said this might have been designed as a way to show China was interested in an increased stake in the highly profitable Cathay. Shortly after the application in April, Mr Eddington firmly denied any part of Swire's stake in Cathay would be sold, and said Swire was confident the airline could operate in its current form after 1997. The impending deal comes at a time when Cathay has agreed to new entrants on the lucrative Hong Kong-Taiwan route, which CNAC made no secret it was interested in flying. The Civil Aviation Department yesterday confirmed Dragonair had applied for government approval to fly the route. The move follows a July 31 tentative agreement between Cathay and the Taiwan Airlines Association, in which Cathay after months of negotiations conceded to two new airlines being allowed on the route. Although they were not named, it was anticipated they would be Dragonair and Eva Airways, from Taiwan. Taipei has yet to announce its carrier. Dragonair officials could not be reached for comment, but such an application 'does not take too long' to process, an industry analyst said. One airline source said: 'Swire was rushing to get Dragonair to Taiwan before CNAC could get in. 'CNAC buying a piece of Dragonair will be a way for China to save face.' Morgan Grenfell aviation analyst Viktor Shvets said the deal would be positive for Swire in the short term, and was inevitable. 'Do they have a choice?' he said. 'It was clear right from the beginning CNAC wanted to operate an airline, and CNAC really showed to Cathay and Swire who is the master. 'They have the capability to destroy the value of Cathay, or create a value. 'On balance, at least Swire made sure it is here for at least a few more years.' Former Dragonair chief executive Steve Miller said yesterday he was not overly surprised. 'It makes sense.'