US private equity firm Carlyle Group will cut its stake in the acquisition of Xugong Group Construction Machinery Co Ltd (Xugong) from 85 to 50 per cent.

The remaining 50 per cent stake will be held by State-owned Xuzhou Construction Machinery Group (XCMG) under a deal signed on Monday, said a statement from XCMG's listed unit Xugong Science & Technology Co Ltd yesterday.

Carlyle confirmed the deal, but declined to disclose further details.

"The reduced offer shows the reluctance of Chinese officials to sell major companies to foreign investors," said an analyst who declined to be named.

Earlier the State Council said key Chinese equipment makers should be controlled by domestic interests.

"Big and important equipment producers must seek opinion from relevant departments of the State Council if they want to sell stakes to foreign investors," said the State Council statement.

"China encourages restructuring of such companies on the basis that the country has the controlling power."

Last October, Carlyle agreed to buy 85 per cent of Xugong for US$375 million, the biggest acquisition by a foreign investor of a controlling stake in a leading State-owned company in China.

The takeover has raised concern that China has been selling its strategic companies too cheaply to foreign investors.

The deal has been in the hands of the central government for a long time.

Earlier media reports said that the government would not approve the deal unless Carlyle pledged not to sell its majority stake to a foreign construction equipment group in the future.

Analysts said that Xugong is a leader in the industry and owns many advanced technologies, and that China may lose its technology to foreign competitors if many companies like Xugong are sold to foreigners.

They also said that selling off a major firm like Xugong to a foreign company may hurt the whole construction machinery industry.

Earlier in June, Chinese heavy machinery manufacturer Sany said it aimed to pay 30 per cent more than Carlyle to buy Xugong, its larger rival.

"The price that Carlyle Group agreed to pay for the purchase was undervalued. We could pay 30 per cent more or even higher," said Xiang Wenbo, executive president of Sany Corp.

"We have been planning to buy Xugong for a long time."

Xiang said it was not good for China's machinery industry to sell a significant firm like Xugong to a foreign company.

Source: China Daily