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SHANGHAI, Aug 17 (Reuters) Air China Ltd. , the country's flag carrier, is set to receive a lukewarm reception when it lists in Shanghai on Friday, dogged by concern about the airline industry and weakness in its Hong Kong H-shares.

The airline, one of Shanghai's high-profile listings this year, should avoid falling below its domestic IPO price of 2.80 yuan on its debut, analysts said. Some even predict a first-day rise of several percent.

But, to ensure its initial public offer went ahead, Air China slashed its offer by nearly 40 percent to $575 million and pledged to buy back up to 600 million shares if they fall below the IPO price by the year-end.

''There's just not much interest for airline counters as they are too vulnerable to oil prices,'' said Lu Congzhen, a senior analyst with Orient Securities. ''Without the cut-back and other things, it could have fallen on its debut.'' Traders said Air China's debut has long been expected to be sluggish, and so should not weigh much on the Shanghai market.

However, other recent listings, such as Bank of China and Daqin Railway , could be dragged lower by a poor performance by the airline.

Air China's timing is unfortunate, analysts said. China's share market is the world's top performer so far in 2006, but the benchmark Shanghai index <.ssec> is consolidating in thin trade and is down 9 percent from its early July high.

The market has also been flooded with IPOs since June, after China lifted a one-year ban on new share offers.

Investors are also bearish on airlines due to surging fuel prices, even though analysts believe Air China itself remained profitable in the first half of this year.

Air China's H-shares, at HK$2.78 in Hong Kong on Thursday afternoon, were just above a six-month low, though they have risen more than 12 percent since the start of this year.

The H-shares are a major threat to the performance of Air China's Shanghai-listed A-shares as, at current exchange rates, the A-shares' IPO price of 2.80 yuan is at a discount of just 2 percent to the H-share price.

Although the two types of share are not exchangeable because of capital controls between Hong Kong and Shanghai, many local Chinese investors want a larger discount -- of maybe 5-10 percent -- before looking at Air China shares, traders said.

Longer term, Air China shares should outperform rival Chinese airlines, but will struggle against the broader market until fuel prices turn lower, analysts said.

Based on 2005 diluted earnings, Air China's IPO price values it at 18.7 times earnings per share, far cheaper than China Eastern Airlines , where a plunge in 2005 earnings has pushed its ratio to about 200 times, and better than loss-making China Southern Airlines .

The overall Shanghai market trades at an average of around 20 times earnings.

($1=7.981 yuan) REUTERS PV SSC1409