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

The State Assets Supervision and Administration Commission has approved Carlyle's revised bid for Xugong. The deal is waiting for approval by the Ministry of Commerce (MOC) to take into effect, the report said, quoting a source close to the deal.

The source said the new deal is very likely to be approved as it has been worked out with the guiding of the MOC.

Carlyle originally offered 370 million U.S. dollars for a 80 percent stake in Xugong. The deal was submitted to the MOC for approval in December last year, but was turned down amid rising concerns that foreign control of key Chinese firms could threaten the country's economic security.

The parties signed a new deal in Mid-October, in which Carlyle reduces its stake to 50 percent, at a cost of 1.8 billion yuan, or 225 million dollars roughly.

Carlyle also loses the board chairmanship to Xugong, but will have equal representation on the board.

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

The Carlyle deal has sparked off a hot debate in China about the potential impact of foreign control of leading firms in the manufacturing sector.

The Carlyle controversy is drawing attention to other "questionable" deals, such as the proposed takeover of the Luoyang Bearing Corporation, a leading bearing producer in China, by German-based Schaeffler Group.

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

The new rules, which took effect on September 8, state that such acquisitions and takeovers must be approved by central authorities in three cases.

The three cases are: the foreign bidder has a market share of over 20 percent and annual sales in China of over 1.5 billion yuan (190 million dollars); the market share of one of the parties to the deal will reach 25 percent after the acquisition; the foreign bidder has acquired more than 10 Chinese enterprises in one year.

In its 11th five-year-plan, MOC said China will seek to improve the quality of foreign investment and put in place a system for monitoring the impact of foreign investment on domestic industries.

Zhao Jinping, a scholar with the Development Research Center under the State Council, said it is common international practice for governments to impose restrictions on mergers and acquisitions by foreign companies.

"As rules and regulations are fine-tuned, the government will be able to handle such cases more easily and transparently," he said.

He Manqing, a MOC expert on multinational companies, predicted that mergers and acquisitions by foreign investors in China will increase sharply over the next few years, now that the rules have been set.

For some people, however, Carlyle's new offer is still not good enough.

Xiang Wenbo, who vehemently opposes the deal and sparked the debate by revealing the deal in his blog, said the 50-50 share structure would not guarantee the Chinese side's control of the firm, as required by government rules.

Xiang is general manager of Sany Heavy Industries Co., a rival who also bid for Xugong. Xiang said Xugong had deliberately excluded Sany and all other rivals from the deal.