(Repeats to additional customers with no changes to text)
By Brenda Goh, Allison Lampert and Brad Haynes
SHANGHAI/MONTREAL/SAO PAULO, Dec 19 (Reuters) - New rules governing Chinese airline startups are fueling hopes at Embraer SA, Bombardier Inc and other regional jet makers for a spike in orders next year, but local competition and doubts about size restrictions still loom as major obstacles.
The new policy is aimed at encouraging fledgling carriers to boost domestic flights serving secondary markets in China rather than focusing exclusively on big cities. The three-month old policy has still not been published in its entirety, leaving the industry guessing on some key details.
But provisions include scaling back access to major hubs and a requirement that new regional carriers operate at least 25 smaller city-hopper jets before graduating to bigger aircraft, according to three industry sources familiar with the policy.
That could translate into Chinese demand for more than 250 new regional jets in the next two years, said one source familiar with a planemaker's outlook, providing a shot in the arm for a new generation of aircraft that has suffered a string of setbacks. Another source familiar with the market called the prospects more limited.
China is seen as anxious to prevent carriers from using niche markets as a back door to the main airline business by grabbing licenses to set up small regional or cargo airlines and then quickly defecting to the more lucrative big-city segment, dominated by Airbus and Boeing.
On paper, that should boost demand for regional jets including China's delayed ARJ21, developed by the state-owned Commercial Aircraft Corporation of China (COMAC).
The support for regional aviation in China should also encourage foreign market leaders such as Bombardier and Embraer, according to Yang Yang, a director at COMAC's Shanghai Aircraft Design Research Institute.
"This will potentially give them a big market to target," he said.
Regional jet makers have been recovering from development hitches in recent years, only to find that demand has now slowed in their main markets in the United States and Europe as predictions of robust orders from Asia have yet to materialize.
A spokesman for Canada's Bombardier said the new policy offers regional airlines "many new opportunities" and Brazil's Embraer called it an "insightful ... new policy to promote regional aviation."
Russia's Sukhoi Civil Aircraft said the company started regular talks this year with potential Chinese customers for its recently introduced Superjet regional aircraft.
Others, such as Japan's Mitsubishi Aircraft, are keeping a lid on expectations, wary of competition from the ARJ21, China's first homegrown passenger jet, which COMAC put into service this year.
"We think in general China has a huge potential," said Yugo Fukuhara, a vice president for sales of Mitsubishi Aircraft, a unit of Mitsubishi Heavy Industries Ltd, which is developing another newcomer to the regional jet market.
"At the same time, we have competition from the ARJ21, developed by China themselves, and also some political barriers," Fukuhara said, alluding to diplomatic tensions between Japan and its neighbor across the East China Sea.
Analysts say the Civil Aviation Administration of China (CAAC) wants to encourage a more diffuse network after most airlines launched in the past three years focused on busier mainline routes, leaving secondary markets underdeveloped.
But the regulatory changes in the country may also make it harder for new airlines, as feeder routes are often less profitable and face stiff competition from China's fast expanding high-speed rail network.
China had 57 airlines at the end of 2015, only 12 of which were regional carriers, according to a report from the Shanghai Aircraft Design Research Institute.
Embraer has made the most progress among foreign planemakers with those airlines, delivering 91 aircraft of 123 firm orders through September - about twice Bombardier's tally, according to the companies' latest quarterly reports.
However, Chinese order books for both companies are dwarfed by the ARJ21, which has racked up more than 400 orders since the program was launched in 2002.
Comac says the ARJ21 holds advantages such as its domestic service network and performance standards tailored to the country's hot and high-altitude western plateau.
But it has delivered just two planes to launch customer Chengdu Airlines so far, leading analysts to question the feasibility of the Chinese regional jet.
Development of the ARJ21 was delayed by nearly a decade, dogged by flawed designs for wings, wiring and computer systems, according to a 2012 Reuters investigation. The aircraft has yet to be certified by U.S. authorities.
"The ARJ21 is not a functioning aircraft," said Richard Aboulafia, vice president of analysis at aviation consultancy Teal Group, who publishes widely cited global aerospace forecasts.
Regardless of the ARJ21's prospects, labor disputes in the world's largest regional market also have regional planemakers pinning bigger hopes on new Chinese demand.
U.S. pilots are resisting pressure to allow heavier aircraft to be outsourced to regional affiliates, effectively protecting jobs at the mainline operations of Delta Air Lines Inc, American Airlines Group Inc and United Continental Holdings Inc.
The standoff could lock out Mitsubishi's MRJ90 and Embraer's next-generation E175 aircraft in coming years.
Those size limits, along with low fuel prices, have also slowed new orders to replace aging U.S. aircraft this year.
The size issue could haunt manufacturers in China too. Aviation regulator CAAC has been slow to make public details of the new requirements, known as Rule 96. In particular, they are keeping mum on the specific seat count and weight limits for the loosely defined regional segment.
Embraer's head of commercial aviation, John Slattery, said at an industry event in October that Chinese size limits would prevent the company's 120-seat E195 and rival Bombardier's 110- to 130-seat CSeries from qualifying as regional jets.
"We are confident that all aircraft with five-abreast seating or less qualify within the framework of CAAC Rule 96 and we are working with a number of Chinese carriers in that context," said public affairs director Bryan Tucker.
CAAC did not respond to requests for comment on specific requirements for regional airlines.
Privately-owned regional carrier China Express Airlines, which has been operating Bombardier CRJ900 jets since it began flying in 2006, said it was keeping an open mind.
"We don't have any specific preference for domestic or foreign manufacturers," said Zhang Jian, a general manager at the airline, which has spoken with Comac about the ARJ21. (Additional reporting by Gleb Stolyarov in Moscow, Tim Kelly in Tokyo and Tim Hepher in Paris; Editing by Christian Plumb and Edward Tobin)