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 up to 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 did not respond to requests for confirmation or 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 reported 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. He said: “This strikes me as a rather low valuation, especially compared with overseas competitors.”

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.

The late 2008 arrest of Huang Guangyu, founder of Gome electronics retailer and China’s then richest man, was seen as a political decision by senior leaders who feared Mr Huang’s business empire had become systemically important to the Chinese economy, according to people familiar with the matter.

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”.

The flood of bank lending and stimulus spending unleashed since the start of the year to battle the crisis has mostly been channelled into the state sector, allowing government-owned enterprises like Shandong Steel to survive with the help of generous credit lines while more efficient private competitors struggled.

Shandong Steel was formed just last year when the provincial government merged two state-owned steel producers. That consolidation and the Rizhao takeover are part of a central government plan to consolidate the world’s largest steel industry and create state-owned giants that can compete globally.

Some Chinese media reports have suggested Rizhao did not receive all the required government approvals when it was established in 2003, allowing the Shandong government to aggressively pursue the takeover with support from Beijing.

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.