Australia is poised to block China Mengniu Dairy’s proposed A$600m takeover of some of the nation’s biggest milk brands, as diplomatic and trade tensions rise between Beijing and Canberra.

Just days after China initiated an anti-dumping inquiry into Australian wine, Josh Frydenberg, Australia’s treasurer, has told state-owned China Mengniu his preliminary view is that the takeover of the Lion Dairy brands owned by Japan’s Kirin Holdings Co should not proceed, according to two sources with knowledge of the proposed transaction.

Mr Frydenberg has written to the Chinese company to inform it of his decision and to give it an opportunity to provide remedies or reasons why he should change his mind, the sources said.

Lion Dairy & Drinks is Australia’s second-biggest milk processor, producing about 1bn litres of milk a year. It owns brands such as Pura Milk, Dairy Farmers and Yoplait.

Mergers and acquisitions experts said a decision to block China Mengniu’s deal with Kirin would highlight a growing shift in sentiment against Chinese buyers due to diplomatic and trade tensions between the two nations.

Last year Canberra approved China Mengniu’s A$1.4bn purchase of Bellamy’s, an Australian infant formula maker. In contrast to that transaction, Lion Diary is already foreign owned.

Sandy Mak, a lawyer at Corrs Chambers Westgarth, said recent changes to Australia’s Foreign Investment Review Board rules and additional oversights introduced to safeguard the national interest meant transactions were taking longer. There were more conditions being imposed and in some cases these were not enough to address the treasurer’s concerns.

“So these transactions may ultimately not be approved,” said Ms Mak.

Canberra said it would not comment on the details of any foreign investment screening arrangements “as they apply, or could apply, to particular cases”.

Mr Frydenberg’s decision to oppose the takeover contrasted with specific advice provided by the FIRB to approve the transaction, according to the Australian Financial Review, which first reported Canberra was poised to block the deal. The newspaper said sources cited “diplomatic issues” for the decision.

If Canberra proceeds and blocks the transaction, it would mark the first government veto of a takeover since the Conservative government tightened foreign investment rules in March due to Covid-19.

Kirin and China Mengniu declined to comment on the matter.

Diplomatic relations between Canberra and Beijing have slumped to their lowest level in a generation. Canberra infuriated Beijing when it called for an independent inquiry into the origins of the Covid-19 outbreak in Wuhan in April.

Since then Beijing has slapped punitive tariffs on Australian barley, restricted some beef imports and begun an anti-dumping inquiry into wine imports.