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The Manchurian beer war took shape 104 years ago when a Russian man founded China's first beer factory just south of the Siberian border and named it after himself—Ulubulevskij Brewery. Japanese managers took over after Emperor Hirohito's forces conquered Manchuria, as that part of northeast China was known, and the company later fell into the hands of the Soviet Red Army. Only in the 1950s, after Stalin ordered the return of Chinese assets, did managers from the mainland take control; in the famine years that followed, they brewed the first Chinese beer from corn. These days the Harbin Brewery Group is a pioneer yet again. Having listed on the Hong Kong Stock Exchange in June 2002, it has become the target of China's first hostile takeover, pitting the world's two biggest brewers against one another in a battle to dominate the largest beer market anywhere.

Last week, Anheuser-Busch, the world's No. 1 brewer by volume, announced its intention to buy 29% of Harbin Brewery. SABMiller, A-B's nemesis (formed in July 2002 when South African Breweries bought out the Wisconsin-based Miller Brewing Company), retaliated by declaring that it would launch a $391 million hostile takeover bid for Harbin. The prize is a company that made a profit of just $15 million last year but that offers a coveted entrée into the beer-loving northeast of China.

As with any great conflict, the takeover attempt and the expected bidding war signals deeper strategic shifts. For years, Beijing pushed foreign companies into joint ventures with Chinese partners. The results were often disastrous for both sides. But as the Communist Party has slowly put its stamp of approval on privatization, it's become easier for foreign companies to buy into state enterprises such as breweries. Sensing new possibilities, SABMiller, owner of the Miller brands, gambled that Beijing might actually tolerate its unprecedented takeover gambit. If it works, "a lot of investors will try to steal a similar march on rivals," says Joe Zhang, an analyst at UBS Securities in Hong Kong. "People have never tried this because they thought the government would block it."

It's fitting that the first hostile takeover bid comes for beer, a Chinese market over which foreign companies have long drooled. Even two decades after economic reforms began in 1978, China still had about 800 breweries, most set up by local governments. Only one, Tsingtao, has built a national name. The vast majority, with brands like Celestial Peach and Country Man, stay local and sell their brews for about 25¢ per bottle. Many recycle damaged bottles so often that they go off like grenades—"beer-bottle explosions were responsible for most of last summer's consumer injuries," says the China Consumers' Association. Yet this fragmented market has grown so fast that China passed the U.S. as the world's biggest guzzler in 2002, and by 2007 one in five bottles sold in the world should flow into Chinese bellies.

In the past, high-profile foreign attempts to get a piece of this action have ended in failure. Early flops included Fosters' (the company pulled out of a joint venture in 1999, with a loss of more than $125 million) and Becks' (the company left China soon after). Those that stayed have shifted strategies. SABMiller doesn't produce its top brands, Miller Lite and Miller Genuine Draft, in China. Instead, it buys into Chinese breweries and helps them upgrade. A-B produces Budweiser in central China and has turned it into one of the country's best-known foreign beers; it also has a 10% stake in Tsingtao; and it's now negotiating for stakes in smaller Chinese breweries. Other foreign companies are following. World No. 3, Interbrew, has management control of joint ventures with 17 Chinese breweries, giving it a stable of brands, such as Double Deer, and it is scouring the countryside for more deals. "In early days, operators just weren't sure they could run local brands," says Wai Kee Tan, Interbrew's vice president in Asia, but they have since "gotten the hang of marketing and distribution."

The foreigners have been aided by rule changes that make state-run beer companies, and those in many other industries, more open to outside investment. Previously, companies that got listed overseas kept control in state hands by retaining the majority of shares, which couldn't be listed or sold to foreigners. That changed in November 2002, when the government allowed shares still held by listed state-run companies to be sold to foreigners. One of the first to test the new regulation was SABMiller, which paid more than $86 million last year for its initial 29.6% stake in Harbin Brewery. That type of deal represents "a trend toward letting foreigners take control of enterprises that the government doesn't consider a strategic industry," says Carl Walter, managing director of JP Morgan China.

But don't wait for China to put too many of its state assets on the block. It still limits foreign participation in anything it considers sensitive. Foreigners may own only 50% of domestic auto plants, for example, and they aren't allowed to buy outright a Chinese insurer, bank or brokerage. In addition, most state enterprises structure their listings so that shareholders never exert real control. A plum company like PetroChina, for instance, is immune to shareholder meddling because only about 10% of its shares are listed overseas.

Despite the abundant risks of investing in China, it's not hard to see why SABMiller and A-B are so keen to get their hands on Harbin Brewery. Recent years have seen lackluster sales in the U.S., whereas China has emerged as the world's last great growth market for beer. With SABMiller already owning a stake in another large brewery in a neighboring province, A-B saw the danger that its arch rival might become the region's dominant player.

That fear heightened in March, when SABMiller bid for an additional 29% of Harbin Brewery's government-owned stock. That would have given SABMiller control of the company and its premium brand, Hapi—potentially a national rival to Budweiser, which A-B also markets as a premium beer.

Harbin Brewery rejected SABMiller's bid. And, on May 2, A-B itself won the right to buy the shares, which had been sold to an investment group (both transactions await government approval). With the two beer giants now holding roughly equal stakes, something had to give.

"This town is too small for the both of us," says Nigel Sairbrass, spokesman for SABMiller. So his company tried something new. Because the remaining 40-odd percent of shares are listed on the open market in Hong Kong, it was able to issue last week's buyout offer for all outstanding shares. Harbin Brewery's ceo has been vociferous about his preference for a marriage with A-B, but the decision isn't his to make. Instead, his company's future hinges on shareholders, who should soon vote on SABMiller's bid—or on an expected counteroffer from A-B. For the first time, the fate of a Chinese company hangs on overseas shareholders.

Whatever happens, Harbin Brewery's existing shareholders seem sure victors. In just two days last week, their stock surged 51%. For them, at least, there's ample reason to toast the latest foreign interlopers with a taste for Chinese beer.

• Matthew Forney | Beijing
• Why are the world's largest beer brewers fighting over a company in northeast China?