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Cross-strait deal sparks stock surge

Joseph Lo

Shares in China Southern Airlines and China Eastern Airlines, surged yesterday on hopes of accelerating cross-strait ties and renewed rumours that a relaxation of foreign ownership limits was imminent.

Analysts said that the rumours gained impetus from yesterday's signing of a deal for Taiwanese carrier China Airlines to take a 25 per cent stake in China Eastern's air-cargo subsidiary, China Cargo.

Shanghai-based China Eastern rose nearly 10 per cent, to HK$1.03 a share, while China Southern, the mainland's largest domestic carrier, saw its shares rise 4.88 per cent to HK$2.15 each.

The China Airlines deal if successfully concluded, could be a watershed in tearing down political and economic barriers between Taiwan and the mainland, especially in the wake of last week's announcement by President Chen Shui-bian that Taiwan would seek to end the ban on cross-strait links.

It would also be a logical precursor to direct cross-strait services.

Investors pointed to the deal as evidence Beijing's taste for foreign ownership was expanding, as airlines faced a need for capital in the process of merging into three mega-carriers.

Yesterday, China Southern announced it had signed ground-handling agreements with China Northern Airlines and Xinjiang Airlines - two carriers with which it will eventually merge.

China Eastern is approaching the 35 per cent limit for foreign ownership and China Southern has already reached it.

'This has been the first big international equity deal in the sector for a while, so the hope is that this will be the first of many,' said a China-sector analyst at an international brokerage.

But others warned optimism was perhaps not yet deserved.

With both airlines trading at prices below their initial public offering levels, it was unlikely the Civil Aviation Administration of China - which controls the mainland's major airlines - would willingly sell down its stake at this time.

Nor, at present price levels, would raising cash through H-share placements in Hong Kong help either China Southern or China Eastern.

'The consolidation process [of the mainland airline sector] will soak up capital, no doubt. But the most likely avenue for raising funds will be through selling new A shares, or convertible bonds,' UBS Warburg aviation analyst Timothy Ross said.

There was also a question of the validity of the China Cargo deal.

Last month China Eastern chairman Ye Yigan said both governments should approve the agreement by the year-end, however, the deal was still believed to have not progressed to the point where a price for the China Cargo stake had been determined.

China Airlines' Wu Ku-koung, the company's assistant vice-president of cargo sales and marketing, acknowledged that the two companies had yet to sit down and discuss co-operational details.

'The first step was to sign the deal, and then we can proceed to discuss the details,' Mr Wu said.

'So far, we have not yet held any discussions.'