AIR China is planning to establish an air cargo joint venture with Hong Kong-based Cathay Pacific Airways in Shanghai by the end of the year to boost the mainland carrier's arket share as it faces stiffer competition, reports The Standard newspaper of Hong Kong.

Air China president Cai Jianjiang said the airline's cargo business is facing fierce competition from foreign carriers as a result of the central government's open skies policy.

Air China has increased co-operation with Cathay Pacific in sales and operations after taking a larger stake in the Hong Kong carrier as part of Cathay's HK$8.2 billion takeover of Dragonair last September, The Standard said.

Air China sold its indirectly held 43.29 per cent stake in Dragonair to Cathay for HK$430 million in cash and 289 million shares in Cathay, giving Air China a 10.16 per cent strategic stake. At the same time, Cathay doubled its stake in Air China to 20 per cent.

The application for the joint venture is expected to be submitted in the first half of this year which would pave the way for deal's completion in the second half.

Under mainland rules, foreign companies cannot collectively hold more than a 49 per cent of a China aviation joint venture, and one foreign firm cannot secure an interest greater than 25 per cent. This has raised the spectre of more than one foreign stakeholder joining the joint venture, unless the proposed JV is granted a waiver by Beijing.