The Australian Competition and Consumer Commission (ACCC) has signalled it may block Qantas Airways’ proposed joint venture with China Eastern.

ACCC chairman, Rod Sims said they are concerned that the proposed tie-up between the two carriers alongside the Australia-China Free Trade Agreement in November, would give the partners more than 80 percent of direct capacity between Sydney and Shanghai, with the remainder held by Air China.

However, the ACCC has left the door open for the Australian carrier to pursue deals with both china Southern and Air China.

The ruling is to be finalised by April 5, 2015, after submissions by interested parties, and rejection could do more than prevent Qantas from increasing international operations. It could also be a setback for Sydney’s drive to boost commerce with its biggest trading partner.

"Their market shares are increasing. Who else is going to provide the competitive tension? We see no sign China Southern is going to fly out of there. Air China hasn't been raising its service levels as demand increases,” said Mr Sims.

Qantas and China Eastern already have a codesharing agreement and had planned to create a five-year joint venture which would combine their operations at Shanghai International Airport from mid-2015.

The Qantas International chief executive, Gareth Evans, said more than 20 airlines already provided services between Australia and mainland China in a highly competitive market.

“New traffic rights recently granted to Chinese carriers means the competition in this market will only increase, which underlines the importance of Qantas forming a strategic partnership with China Eastern so that we can strengthen our network and scheduling offer to customers,” he said.

The structure of the Chinese air market means that carriers tend to operate most services from their main hubs with China Eastern predominantly operating from Shanghai, China Southern from Guangzhou, and Air China from Beijing.

Qantas does not offer any flights to Guangzhou or Beijing, and Mr Sims said he would be less concerned with Qantas signing a joint venture with Air China or China Southern than launching new services to Beijing or Guangzhou as a result.

Shares in Qantas fell as much as 3 percent to a near two-week low after the commission’s initial ruling. The two carriers will work together with the regulator as it approaches a final decision.

Qantas defended the joint venture, saying it would boost bilateral trade, increase services and ultimately open up new routes between the two countries.

Last month, Qantas reported its best first-half earnings in four years, reporting a profit at its international divisions for the first time since the global financial crisis.