China's Hainan Airlines has raised USD$700 million in a share sale as it plans a major fleet expansion to compete with bigger domestic rivals in a fast-growing air travel sector.

The private placement of new shares to domestic institutions gives control of Hainan to Grand China Airlines Holdings, replacing billionaire George Soros as its biggest shareholder, Hainan said in a filing to the Shanghai stock exchange on Friday.

The 2.8 billion new shares were sold at 2 yuan each, less than half the last traded price of the airline's A shares on the Shanghai Stock Exchange of 4.08 yuan. The shares have been suspended since the start of this week.

The airline said the price was reasonable as its net assets would be diluted to 1.93 yuan per share by the placement, compared with 3.72 yuan at the end of last year.

Hainan, which is mainly a domestic carrier but also flies to foreign destinations including Bangkok, Kuala Lumpur, Osaka and Budapest, wants to challenge China's "Big Three" airlines -- Air China, China Eastern Airlines and China Southern Airlines.

"We will use the proceeds to set up an airline group and acquire new planes to increase our capacity," Hainan said. Some of the 5.6 billion yuan will also be used to pay back bank loans and supplement the company's working capital.

Hainan did not give details, but Chairman Chen Feng said last year the carrier wanted to double its fleet to 200 aircraft by 2010 and change its name to Grand China Air by swallowing up three smaller rivals.

The placement leaves Grand China, which is controlled by the investment arm of the government of China's southern province of Hainan, and its affiliates with a controlling 53.67 percent stake in Hainan.

Soros' holding dropped to 3.06 percent from 14.8 percent.

The share offer helped Hainan expand its shareholders' equity to 3.53 billion yuan, five times the previous 730 million yuan. But that is still tiny compared with its big rivals. At the end of 2005, Air China's shareholders' equity was 20.09 billion yuan, China Eastern's was 10.5 billion yuan and China Southern's 9.95 billion yuan.

"Hainan Airlines has a geographic advantage as it's based in China's southernmost province. It's also the only Chinese passenger carrier, big or small, in which foreigners have had a strategic stake," said industry analyst Hu Jiaming at Capital International Holdings.

"But, as a regional carrier, it still has a long way to go to compete with the Big Three in all aspects, including capacity and diversification of routes."

Hainan's fund-raising is part of a wave of expansions and reorganizations in China's fast-growing air transport industry.

The official Shanghai Securities News reported on Friday that China's top two cargo airlines, Air China Cargo and China Cargo Airlines, would merge this year to take on foreign competition.

An official at China Cargo Airlines said no final decision had been made.