The head of a privately-owned Chinese airline has disappeared after takeover talks with state flag carrier Air China broke down and Beijing grounded its fleet.

The case is raising fears of a trend towards re-nationalisation in some sectors in China as state groups use their clout to swallow struggling private competitors.

China's civil aviation authority suspended operations of East Star Airlines, a private regional airline, over the weekend, a day after East Star made a public statement that it was no longer for sale and alleged it had been subjected to strong-arm tactics in negotiations with Air China.

A group of East Star employees who insisted on anonymity told the Financial Times that local officials in the group's home city of Wuhan had interfered in the negotiations with Air China and the government was tapping phones and restricting the movement of executives.

Lan Shili, East Star's chairman and chief executive, has been missing since March 13, according to these employees and Chinese media reports, some of which claim he has been taken into custody. An employee at East Star's head office in Wuhan said no one at the group had any idea of Mr Lan's whereabouts.

The airline has been hit by falling passenger numbers and a debt burden, with creditors including General Electric China and regional airports.

The director-general of the Civil Aviation Administration of China (CAAC), which ordered East Star to halt operations after a request from the Wuhan government, served as Air China's chairman until last year.

When asked if Air China was involved in the suspension of East Star, a spokesman for the airline said: "Air China is an honest and responsible company. Ever since discussions began with East Star two months ago, we have followed related laws and regulations."

Days before talks broke down, Air China signed a framework agreement with the provincial government to build Wuhan into an air transport hub. As well as increased domestic Air China services to Wuhan, the plan envisaged direct flights from the city to Paris, Tokyo and Singapore by 2010 and direct routes to LA, London and Berlin by 2015.

"Large state companies clearly see the economic downturn as an opportunity to take over private competitors on the cheap; we're seeing it in a number of industries," said one Chinese investment banker who asked not to be named for fear of hurting his business.

State companies have been gobbling up private participants in sectors including steel, textiles, coal and oil.

East Star leased nine of its 10 aircraft and an engine from GE Commercial Aviation Services, but had failed to pay rental for "many months", according to GECAS.

File Photo: Lan Shili.