US buyout firm Warburg Pincus has engineered China's first leveraged buyout that will see it and its partners borrow US$282 million (HK$2.20 billion) to buy a 55 percent stake in a mainland pharmaceutical company, sources familiar with the situation said.

Citigroup, the world's largest financial services provider, arranged the five- year loan.

Both Warburg and CITIC Capital Markets Holdings have taken a 22.5 percent stake each in Shanghai-listed Harbin Pharmaceutical Group, the largest domestic medicine company. The other 10 percent is held by a domestic private equity partner.  The city of Harbin, the capital of the northeastern province of Heilongjiang, owns the remaining 45 percent.

The deal comes just over a week after rival US buyout firm Carlyle Group forked out US$375 million for a larger 85 percent stake in Xugong Construction Machinery, China's biggest construction equipment manufacturer. That marked the first time a foreign group had wrested a majority stake in a major state-owned company from its government masters.

The deal, however, failed to use leverage as it was funded internally by Carlyle's existing pile of cash.

The two buyout firsts mark a major shift in China's mergers and acquisition landscape. While Beijing has long been keen to sell off the country's loss making, poorly managed state enterprises, it has long hestitated in giving up control of successful companies to foreign firms.

At the same time, it wants to foster the growth of companies that can hold their own against the growing number of international competitors in the domestic market. The central government has overseas ambitions as well and has tasked the State-owned Assets Supervision and Administration Commission with nurturing as many as 100 globally competitive state-owned firms.

Harbin Pharmaceutical manufactures more than 700 products, including antibiotics, one of the more lucrative sectors of China's pharmaceutical industry because they carry a high price tag for consumers but are relatively cheap to produce. The company also specializes in biopharmaceuticals, or medicines that use biological agents such as recombinant DNA in the manufacturing process instead of the chemical synthesis used for more traditional medicines.

The company is also a big manufacturer of traditional Chinese medicines and has one of the largest distribution networks in the mainland.

Market observers expect to see more buyouts in China, particularly in the manufacturing sector, where a fragmented market presents a number of opportunities.