* Australia makes preliminary decision to block bids for Ausgrid
* Sale was expected to fetch over A$10 billion
* State Grid, CKI have to Aug. 18 to make submissions to treasurer (Adds comment from Chinese state media)
By Jonathan Barrett and Byron Kaye
SYDNEY, Aug 11 (Reuters) - Australia blocked the A$10 billion ($7.7 billion) sale of its biggest energy grid to State Grid Corp of China STGRD.UL and Hong Kong's Cheung Kong Infrastructure Holdings 1038.HK citing security concerns, in a blow to the country's privatisation plan.
Nine months after clearing the sale of TransGrid to an investor group 40 percent controlled by Kuwaiti and Abu Dhabi interests, Australian Treasurer Scott Morrison said on Thursday he was rejecting the sale of Ausgrid to the rival Asian bidders because of risks to the national interest.
"During the review process national security issues were identified in critical power and communications services that Ausgrid provides to businesses and governments," Morrison said in a statement.
State Grid, China's dominant power distributor, did not immediately respond to requests seeking comment. Cheung Kong Infrastructure (CKI), controlled by Hong Kong billionaire tycoon Li Ka-Shing, said the decision was not related to CKI.
Australia's decision to reject the bids deprives the New South Wales state government of what would have been a record haul for a single privatisation sale, and also underscores the country's changing political climate since a handful of protectionist senators took power in elections last month. Australian Senate cannot block offshore sales, but Morrison's conservative government needs to maintain favourable relations with the crossbench which now holds the balance of power in the upper house.
CHINA TIES
The decision also sets new parameters to the relationship between Australia and its biggest export partner just eight months after a A$100 billion free trade agreement took effect.
"If you put your biggest trading partner in the category of 'security risk', it might start to impact on the overall atmosphere, and on Chinese involvement in other areas," said Hans Hendrischke, a professor of Chinese business at University of Sydney's business school.
"That is not necessarily something you want with bidding for other big infrastructure projects," he added, noting Chinese interests have routinely bid in Australian infrastructure sales.
China's state news agency Xinhua said that Chinese investment should not become a source of strategic concern for trade partners but a sign of cooperation.
"To suggest that China would try to kidnap the countries' electricity network for ulterior motive is absurd and almost comical," Xinhua said in a commentary, reflecting government thinking.
"It's also ridiculous to suggest that Chinese enterprises would risk their credit and commit suicide on the world stage by threatening to deny the Australian and British public electricity," Xinhua added.
Britain has delayed signing off on a $24 billion nuclear power project, which has deeply frustrated the Chinese government. OVER AUSTRALIAN PORT SALE
Apart from Ausgrid and TransGrid - which State Grid also attempted to buy last year - the government of NSW, Australia's most populous state, has put up a third grid for sale, rural-focused Endeavour Energy, expected to fetch about A$5 billion based on the valuation models used for the first two.
The national sell-off programme has been under political pressure since the 2015 sale of Port of Darwin to Chinese government-affiliated interests that sparked a backlash over the security implications and even a rebuke from U.S. government officials.
Soon after that, Morrison blocked proposed sales of the country's biggest agricultural land holding, S. Kidman Co, to Chinese bidders.
NSW Treasurer Gladys Berejiklian said she respected the federal government's decision and "there will be no delays to our infrastructure pipeline".
In a statement to Reuters, CKI spokeswoman Wendy Tong Barnes, said: "We believe that the Australian government must have reasons beyond the obvious which led them to make today's announcement. The issue is unrelated to CKI."
State Grid and CKI have until Aug. 18 to make submissions to Morrison. A further rejection would open the possibility that the sale process would be re-run in the hope that a competitive local bid would emerge for the network that serves nearly a quarter of NSW's 7.5 million people.
($1 = 1.2994 Australian dollars)