China's great shopping spree for key strategic Hong Kong industries began with the airlines. Since then, power and telecommunications have fallen into its orbit. Yesterday, events seemed to go full circle as Cathay Pacific shares soared on rumours of a China deal. Predictably, the company said it was unaware of talks with potential new shareholders. Having cried wolf once before, investors will take some convincing. Rumours aside, there are plenty of good reasons for Swire Pacific to sell more of its 43.86 per cent stake in Hong Kong's de facto flagship carrier. When the British hong ceded control it was thought uncertainty had been slain. Potential competitor China National Aviation Corp (CNAC) bought into Dragonair, later reducing its small stake in Cathay. The settlement seemed complete and clear skies beckoned. Instead, Cathay encountered a stream of bad news. Falling route yields, a weaker Japanese yen (now seemingly reversed), higher airport fees at Chek Lap Kok and grinding cost increases at home saw investors desert. Before yesterday's surge the stock had underperformed the Hang Seng Index by 36 per cent over the past year. Political considerations aside, there is an ongoing debate within Swire management as to whether it should stay with the airline game at all. Managing a complicated, capital intensive business with the prospect of years of running just to stand still has prompted calls for the stake to be further reduced. Consensus is thought some way away, but events could yet force the issue. Yesterday's market moves may, of course, represent nothing more than catch-up buying in response to specious rumour. Yet, the logic for Swire engaging China further is clear to see. A raft of mainland airlines want a piece of the Hong Kong international traffic pie. Not the front door entry that CNAC achieved with Dragonair, but using stop-over rights to collect passengers at Hong Kong's new international airport. China's independent airlines have high hopes of taking international traffic through so-called fifth freedom rights. The Civil Aviation Department imposes strict limits on the number of tickets sold this way, but they clearly hope for a relaxation of the rules. Despite the poor international reputation of mainland carriers more price competition would inevitably hit Cathay hard. Increasingly, pressure from the US and Europe is for open skies undermining cosy bilateral arrangements that allow bloated profit margins to be maintained. Bringing in another Chinese shareholder should secure a broader front for defending its market position in Hong Kong. Talk yesterday was of a Beijing ministry or even CNAC, which reduced its stake to 1.57 per cent, having earlier promised to be a long-term investor in the company. With CNAC winding up for a public flotation in Hong Kong there is a certain amount of logic to such an acquisition. Being a carrier with diversified holdings in the Hong Kong aviation industry makes for a strong sales pitch. That said, CNAC has firmly sided with Dragonair, which continues to achieve huge growth in China by being awarded highly lucrative routes. Swire never ruled out selling more of its stake. Given recent events today's denials are unlikely to be taken at face value. Yet given the airline's core problems of rising costs and increased competition a mainland shareholder does not necessarily promise a panacea.