Merrill Lynch will issue half of the HK$3.1 billion flotation in Hongkong, according to industry sources.

Peregrine is expected to have a significant stake in the issue, with Barings and Hoare Govett Asia likely to participate as underwriters.

Other brokers - such as Standard Chartered and Wardley - were also interested in participating, but details on the sub-underwriting had still to be finalised, the sources said.

Shanghai Petrochemical is the first of nine mainland companies slated to list in the territory.

Merrill Lynch was granted the underwriting contract early last month and soon after rumours started to emerge that, contrary to Beijing's stated policy, the firm would list in New York with Hongkong being only a secondary listing.

The issue became a political hot potato following comments by Mr Raymond Lai Cheuk-fan, Merrill Lynch's managing director of institutional sales, that confirmed the rumours.

It is believed that it was at this stage that the central government stepped in to insist that Hongkong remain the primary listing.

An industry source said: ''Although Beijing has clearly indicated that all nine companies have to float in Hongkong, Shanghai Petrochemical is in favour of seeking the listing in New York.

''That's why the company granted the contract to Merrill Lynch: they both wanted to try to change Beijing's attitude.'' When Merrill Lynch finalised the underwriting contract with Shanghai Petrochemical early last month, top officials at the head office and a United States lawyer with Coudert Brothers were both present at a meeting.

''If they didn't have the intention, why bother to arrange that meeting?'' asked the industry source.

''If Shanghai Petrochemical is listed in New York, Merrill Lynch can take on a larger part of the issue, Shanghai Petrochemical is a star listing, Merrill Lynch doesn't want to share too much with others.

''And obviously Shanghai Petrochemical likes to list in New York. It will have a higher price there,'' he added.

However, the Stock Exchange of Hongkong was upset when it learned of the turn of events.

''Can you imagine how Mr Charles Li [the executive director of the Stock Exchange in Hongkong] would feel if Shanghai Petrochemical has the primary listing in New York? He is the man giving the biggest effort to kick off the issue,'' said the source.

Vice minister of Beijing's State Commission for Restructuring, Mr Liu Hongru, who heads the reform of the securities industry in China, is also concerned with the matter.

The other eight mainland companies have become cautious with their listing plans.

''Beijing is very unhappy with Shanghai Petrochemical. We are told to take the lesson and don't leak out any information before [it is] confirmed,'' said a general manager of one of the eight companies.

An official from Beijing Renmin Machinery, one of the eight, said last week: ''We are told not to speak to the overseas press at the moment while details of the listing plan are being finalised.'' Earlier the company had been keen to talk to the press.

Mr Lai of Merrill Lynch will officially terminate his employment contract with his office today.

Mr Lai did not comment on why he was leaving the firm but said: ''At the moment, it's too sensitive to make any explanation. But the truth will be known when the matter is settled.'' However, according to another senior official of Merrill Lynch, Mr Lai's resignation was made in December.

His leave is due to a company restructuring. Mr Peter Clerk, incoming president of institutional sales, will head all divisions concerning the business in Southeast Asia, including Mr Lai's department.

The appointment upset Mr Lai and he resigned as soon as Mr Clerk arrived in Hongkong.

Mr Clerk worked with Salomon Brothers in England before. His employment was made in November and he arrived in Hongkong last month.

In a separate move, Merrill Lynch will close three of its six offices in Japan after suffering from the fall in trading volume and prices on the Tokyo exchange over the past three years.

Merrill Lynch's move to close branches in Kyoto, Kobe and Yokohama is part of a restructuring of Japanese operations by foreign brokerages.