Investors cashed out of China Eastern Airlines on Monday, sparking a 10.5 percent drop in its shares as hopes waned that Cathay Pacific Airways would unveil an alliance with Air China to buy part of the Shanghai-based carrier.

Cathay and Air China said they would release statements later on Monday to clarify the situation, after persistent market talk that a deal was in the works had sent China Eastern stock 8 percent higher early on Monday.

Analysts and media reports had said Cathay, Asia's No. 3 carrier, and Air China hoped to scupper a planned acquisition by Singapore Airlines and its parent Temasek of a near-$1 billion stake in China Eastern, to protect their market position.

But China Eastern's stock, following a 50 percent gain last week, did an afternoon about-turn as analysts cast doubt on the probability of a deal going ahead.

It seems investors estimated the Cathay deal was only a rumour, said Castor Pang, a strategist with SHK Financial. The rumour pushed the stock price up too high.

CLSA's Adrian Lowe felt a China Eastern investment was unlikely, arguing instead that Cathay and Air China might be on the brink of announcing an asset or share swap.

Speculation in recent days has ranged from a potential bidding war between the Cathay and SIA camps to a government-led takeover of China Eastern. Newspapers, including the Wall Street Journal, cited sources as saying an investment was imminent.

Cathay Chief Executive Anthony Tyler told Reuters via telephone from Seattle that he would not comment on the reports. A Cathay spokeswoman said the firm would make a statement after Monday's market close.

China Eastern hasn't received any proposal from Cathay Pacific to date, the airline's executive director Luo Zhuping told Reuters.

Trading in Cathay's and Air China's stock was suspended from Friday.


Air travel is booming in China, fuelled by double-digit rates of economic growth, surging international tourist and business travel and Beijing's hosting of next year's Olympic Games. But the insular sector had been void of foreign investment until Cathay and SIA both engineered deals.

Singapore Airlines and Temasek this year proposed buying a combined 24 percent of China Eastern for US$918 million. The deal awaits shareholder and regulatory approval. Stephen Forshaw, Singapore Airlines spokesman, declined comment.

Chinese carriers are under pressure amid a rapid open-sky policy taken by the authorities, and investors can help them speed up reform and improve standards, said an analyst at a European bank.

China Eastern shares jumped to a record HK$10.50 in early trade before dropping back to stand 10.5 percent lower at HK$8.70.

Chinese airline stocks have made strong gains in the past week amid rumours about an impending consolidation or overhaul of the aviation sector, in the run-up to a Communist Party Congress in mid-October.

Shares in larger rival China Southern slid 11.4 percent on Monday, but that came after the operator of the country's largest fleet jumped 32 percent in a week. Air China gained 27 percent last week.

Maybe it's due to speculation, said Ben Kwong, chief operating officer at KGI Asia Ltd. It seems it's not as easy to back out of the Singapore Air deal.

Air China owns 10.14 percent of Cathay, which in turn holds 17.3 percent of Air China. Shares in Cathay, which helmed an acquisition of mainland-focused Dragonair last year to gain access to the Chinese market, rose 12.4 percent over the past week.

Analysts said a stake purchase could benefit Cathay by blocking SIA from grabbing market share on lucrative routes across China, the world's fourth-largest economy.

What Cathay can offer is very similar to what Singapore Airlines can offer, said an analyst at another European bank.

Shares in Swire Pacific, Cathay's top shareholder, hit a record high on Monday. Singapore Air's shares ended flat.

Foreign companies can own a combined maximum of 49 percent of a Chinese airline, while a single foreign company can have no more than 25 percent, according to government policy.

(Additional reporting by Alison Leung)