UPDATE 2-Australia approves Chinese takeover of Felix Resources

* Australia give conditional approval to China's Felix deal

* Chinese owner must list the assets on Australian exchange (Adds details, background)

By Denny Thomas

SYDNEY, Oct 23 (Reuters) - Australia approved Chinese firm Yanzhou Coal Mining Co's (1171.HK) $2.9 billion takeover of coal-miner Felix Resources Ltd FLX.AX on Friday, but said the local firm's assets must be run by an Australia-based company.

The deal is also conditional on listing the local unit on the Australian market and trimming Yanzhou's holding, but it does not change Australia's declared bias against takeovers of greenfield resource projects or major mining companies.

"I won't say this is a dramatic shift in government policy," said Ian Ramsay, a law professor of University of Melbourne.

"We are seeing government policy evolve in relation to foreign investment decisions and that is certainly the case in relation to investments by Chinese companies in Australian resources sector."

Chinese state-owned companies have been looking to buy up Australian mining assets to secure supplies of raw materials for its rapidly growing economy, the world's third largest.

But bilateral ties have been strained by Canberra's opaque and sometimes lengthy process for vetting foreign investments, with some high-profile deals falling through before a decision is reached or after strict conditions have been imposed.

"The government is looking for an acceptable middle ground. This does send a pretty positive message and I say this because these are not unduly onerous undertakings," Ramsay said.

LOCAL LISTING, EXECUTIVES

The Australian government has stipulated that Yanzhou Coal must list the local unit on the Australian stock market by 2012 and cut its ownership to less than 70 percent, Assistant Treasurer Nick Sherry said in a statement.

Sherry said Yanzhou had already accepted these conditions, as well as promised to base the local unit's chief executive and chief financial officer in Australia.

Yanzhou further agreed to market coal produced at all of its Australian mines "on arms-length terms with reference to international benchmarks and in line with market practices."

Felix, which has mines in Queensland and New South Wales states, produced 4.8 million tonnes of coal in the year to June. Analysts expect the deal to boost Yanzhou's output by about 10 percent.

"With these undertakings provided by Yanzhou, I consider that this acquisition is consistent with Australia's national interest," Sherry added.

In March, Canberra rejected Chinese state-owned firm Minmetals' $2.26 billion bid for all of local miner OZ Minerals (OZL.AX) on national security grounds.

Other mooted deals have also been derailed.

Anglo-Australian miner Rio Tinto (RIO.AX)(RIO.L) walked away from a $19.5 billion tie-up with state-owned Chinese metals firm Chinalco after several delays to the Australian approval process.

And last month, China Nonferrous Metal Mining (Group) Co Ltd dropped its bid for Australian rare-earths company Lynas Corp (LYC.AX), citing stiff conditions imposed by Australia.

But that has not deterred China from pursuing more acquisitions. Australia's Foreign Investment Review Board has been flooded with applications, including Chinese state-owned Sinochem's bid for farm chemicals group Nufarm Ltd (NUF.AX) and Baosteel's plan to buy 15 percent of iron ore explorer Aquila Resources (AQA.AX).

Last month, FIRB general manager Patrick Colmer said the board wanted to limit foreign investments in start-up projects to less than 50 percent and in major mining firms to 15 percent. ($1=A$1.08) (Editing by Lincoln Feast)