A hostile takeover of one of China's largest non-state steel groups by a state-owned competitor could be finalised as early as next week in a deal that has heightened concerns about creeping renationalisation.

State-owned Shandong Iron and Steel Group, the world's ninth-largest steelmaker by capacity, is likely to take a two-thirds stake in privately held Rizhao Iron and Steel, according to two people familiar with the matter and Chinese media reports.

Du Shuanghua, Rizhao's majority owner and China's second-richest man last year according to the Hurun Report rich list, has fought a bitter battle to avoid losing his company to Shandong Steel, a newly formed group controlled by the provincial government of Shandong, in the country's east.

Mr Du attempted to block the takeover by handing as much as 30 per cent of Rizhao's shares at a low valuation to Kai Yuan Holdings, a Hong Kong-listed company which is controlled by close relatives of Hu Jintao, Chinese president, according to people familiar with the trans- action and Hong Kong media reports.

Kai Yuan Holdings refused to comment.

The plan to block Shandong Steel's advances eventually failed because the involvement of the president's relatives was too obvious and any perception of favouritism would have been politically dangerous for Mr Hu, the people said.

In the first half of this year, when many state-owned steel mills posted losses, Rizhao's profits hit Rmb1.8bn ($263m) while Shandong Steel, three times the size of Rizhao in terms of production capacity, reported a loss of Rmb1.3bn for the same period.

According to Chinese media reports, Shandong Steel will inject Rmb16bn of new capital into Rizhao in exchange for the two-thirds stake, leaving Mr Du to share the remainder of the company with his new Hong Kong-listed partner.

The Hurun Report conservatively estimated Rizhao to be worth about Rmb30bn at the end of last year but Shandong's investment values the company at about Rmb8bn, according to Rupert Hoogewerf, Hurun Report chief executive. “This strikes me as a rather low valuation, especially compared with overseas competitors,” he said.

The deal is being closely watched in the Chinese business world, where many private entrepreneurs complain the state is expanding aggressively in industries that were partially privatised over the past decade, such as airlines, metals, petrochemicals and consumer goods.

Analysts say the central government does not have a policy of actively encouraging renationalisation but that Beijing's response to the economic crisis has accelerated a process known in Chinese as “guojinmintui” or “the state advances as the private sector recedes”.

Rizhao Steel said the Shandong Steel acquisition was still under discussion. Shandong Steel could not be reached for comment and the Shandong provincial government, which controls the company, refused to comment.