SEPTEMBER 24 Just inside the gates of the Shanghai Aircraft Manufacturing Factory, the Chinese flag flies high over the main building and a billboard declares: 'Pursuing No 1'. Now the factory is showing its patriotism in another way - pursuing China's dream of building its own aeroplane. China's plans to produce a small regional jet to meet strong demand are finally starting to take wing. But making the project a commercial success will be difficult, according to industry officials. It has been two years since state-owned China Aviation Industry Corp I (AVIC I), parent of Shanghai Aircraft Manufacturing Factory, announced plans for the ARJ (advanced regional jet). The five billion yuan (about HK$4.6 billion) project is starting to move forward with recent approval by the government and a funding grant. According to state media reports, China hopes to start trial flights of the 70-seater plane by 2005 and begin commercial production by 2007. AVIC I has already set up a company to design and produce the plane, drawing on resources from its plants in the cities of Shanghai, Xian and Shenyang. China sees the ability to produce its own plane as a matter of national pride. Shanghai mayor Chen Liangyu has expressed a desire on China's part to reduce dependence on foreign companies. 'China ought to have its own civil aircraft. Every year we buy so many Boeing and Airbus planes. At least we can produce a regional jet,' he said in a recent interview. But even so, industry officials say the project will draw heavily on foreign technology. There will be no foreign partners - AVIC I has opposed such a move. But it is talking to several overseas firms about supplying components. The company was in talks with General Electric of the United States to supply engines and Ukrainian aircraft maker Antonov for the fuselage, industry officials said. AVIC I officials said the company was also seeking foreign vendors for the plane's avionics. 'What is lacking is a foreign partner that acts as a kind of systems integrator to say how the overall design works. That's something AVIC I feels proud that they can and should do themselves,' an industry official said. But China's past forays into building planes, even with foreign help, have been failures, analysts said. The MA-60, a turboprop built by AVIC I and based on the overhaul of a Russian design, has fallen far short of its sales target of 50 planes from 2000 to 2005. Tiny Sichuan Airlines is one of the few domestic carriers which has bought the plane. In 1998, China quietly scrapped plans to build 20 MD-90 aircraft in a deal with McDonnell Douglas. China had originally agreed to build 40 planes, but only two planes, assembled from kits, were eventually built. In another widely-trumpeted deal, Airbus and China said in 1996 that they would jointly build a 100-seat 'Asian Express' jet which would become part of the Airbus family. Disagreements over technology transfer and the size of the plane caused the project to founder. Some industry officials express concern China wants to build the regional jet for the wrong reasons, allowing patriotism and pet projects to hold sway over commercial considerations. 'If you look around the whole spectrum of Chinese industry, every single industry seems to have a pet project - it's a national pride thing,' another executive said. AVIC I is also keen to make a splash at the Zhuhai Air Show in early November and compete with sister company AVIC II, which is planning a smaller 50-seater regional jet. China created the two companies from the break up of the former Aviation Industries of China in 1999. Unlike AVIC I, AVIC II has actively sought a foreign partner for its project. Fairchild Dornier was on the verge of signing an agreement with AVIC II last year, but disagreement over terms and the US-German aircraft maker's filing for insolvency scrapped the deal. China has just approved plans for AVIC II and Embraer to assemble the Brazilian firm's ERJ-145 regional jet from kits. Industry officials said the two were still haggling over the details. Yet the potential demand for a regional jet is massive. Boeing estimates that China will need 450 new regional jets in the next 20 years, driven by rapid economic growth, increased tourism and the push to develop western regions.