China Eastern Airlines has won regulatory approval to set up an airline with aircraft manufacturer AVIC I, maker of the country's first domestically developed regional jet.

China Eastern will own 40 percent of Happy Airlines Co, with the remainder held by state-owned AVIC I, an investor relations official at the airline said, confirming a report in the official Shanghai Securities News on February 29.

The new regional airline will have capital of 1 billion yuan (US$140 million) and fly planes manufactured by AVIC I, which also makes fighter planes and bombers.

The airline will initially fly MA60 jets and eventually use the ARJ21, a domestically developed aircraft which is due for its first test flight during the first half of this year.

The China Eastern official, who declined to be identified, said the deal was not large enough to require a public statement through the Shanghai Stock Exchange.

Happy Airlines, to be based in Xi'an in western China, will ultimately build up a fleet of 100 jets and help the Shanghai-based airline to expand its operations nationwide, the newspaper said.

Chinese carriers are expanding capacity at a rapid clip, hoping to cash in on a travel boom as increasingly affluent Chinese take to the skies for business and leisure.

On February 26, China Eastern formally rejected a proposed tie-up with flag carrier Air China, pledging to seek another strategic investor to bolster its management expertise and competitiveness.

China Eastern's shares rose 2.35 percent by late morning to 14.8 yuan, compared with a 1.18 percent rise in Shanghai's benchmark index.