A Chinese bid to buy 20 New Zealand farms will be rejected or severely restricted after a review by the Overseas Investment Office, the Herald understands.

Landcorp, the state-owned farming enterprise, is believed to be back in the running to buy the Crafar farms, as the future looks increasingly murky for an offer from Hong Kong company Natural Dairy.

It is understood the Overseas Investment Office has nearly completed its review of Natural Dairy's application to buy 20 farms owned by the Crafar family in the central and lower North Island, and that it has either rejected the application or suggested significant constraints on it.

The Government will have the final say on whether the deal will go ahead.

It has nominated Land Information Minister Maurice Williamson and Conservation Minister Kate Wilkinson to make the decision.

While there have been mixed messages from the National Party about its position on the issue, Prime Minister John Key has made it clear the Government has sympathy with widespread public concern about such a sizeable sale of dairy farms to foreign owners.

A Herald investigation also revealed concerns about the credibility of the investors backing the bid.

Chris Kelly, chief executive of Landcorp - whose bid for the Crafar empire was rejected by receivership firm KordaMentha after tenders closed in July - declined to comment.

But it and other bidders vying with Natural Dairy to buy the farms are believed to be optimistic that they are back in the picture.

That means the banks owed more than $216 million by the Crafar family for 16 of the farms could lose a big chunk of their money.

High Court documents show Natural Dairy has agreed to pay $213 million for the farms.

But the price of rural land has dropped since then and it is understood the other buyers are offering around $130 million.

Natural Dairy spokesman Bill Ralston said yesterday that the company had a "well-developed plan B" should the Government reject its bid.

"They will continue with an altered form of trading in New Zealand. It would not automatically mean a pull-out," he said.

The company has distanced itself from Auckland businesswoman May Wang, with whom it has a deal to export at least 150 million packets of UHT milk from New Zealand to China.

But Ms Wang is proceeding with plans for a dairy factory in Tauranga, using milk mostly from Fonterra.

In Hong Kong, trading in Natural Dairy shares has again been suspended on the local stock exchange, pending a price-sensitive announcement.

Trading in the shares was suspended for five months this year, as the market waited for details about its plans to spend $1.5 billion establishing a dairy business in New Zealand.

The details never came, and last week it said it was shelving ambitious plans beyond the Crafar farms.

Trading resumed for seven days - allowing around $250 million worth of bonds raised by the company to be converted to shares - before it was suspended again.

Natural Dairy originally said it hoped to raise the $1.5 billion from investors to finance its plans.

Mr Ralston said he understood the company would be making an announcement within 48 hours.