China's state assets watchdog has approved the sale of a 50 percent stake in a leading Chinese construction machinery manufacturer to Carlyle Group, a private equity firm from the United States, the Economic Observer newspaper reported yesterday.

 The deal, involving machinery maker Xugong, awaits approval by the Ministry of Commerce, the report said, quoting a source close to the matter.

In a bid that raised concern over foreign control of strategic industries, Carlyle originally offered US$370 million for an 80 percent stake in Xugong. The deal was submitted to the MOC for approval in December last year but was turned down over fears it could threaten the country's economic security.

The parties signed a new deal in mid-October under which Carlyle reduced its stake to 50 percent and offered to pay around US$225 million.

The agreement calls for Xugong to retain the chairman's position, but Carlyle would have equal representation on the board of directors.

The new deal has been approved by the congress of employees as well as Xuzhou city government and the government of east China's Jiangsu Province, where the company is located.

The Carlyle bid sparked off a hot debate in China about the potential effects of foreign control over leading firms in the manufacturing sector.

The controversy drew attention to other deals as well, such as the proposed takeover of the Luoyang Bearing Corp by German-based Schaeffler Group.

The debate prompted the Ministry of Commerce and other authorities to launch new rules in August on the acquisition and takeover of Chinese enterprises by foreign investors.

The new rules, which took effect on September 8, require such acquisitions and takeovers to be approved by central authorities if the foreign bidder has a market share of more than 20 percent and its annual sales in China of over 1.5 billion yuan (US$190 million), if the market share of one of the parties to the deal will reach 25 percent after the acquisition, or if the foreign bidder has acquired more than 10 Chinese enterprises in one year.