The tie-up would pitch the US giant against Kingfisher's B&Q chain in one of the world's fastest developing markets. Ironically, Sir Geoff Mulcahy, who as chief executive of Kingfisher launched B&Q in China, is understood to be playing a key role in Home Depot's arrival. He is a director of HomeWay's parent Home World, which also runs hypermarkets.
Home Depot revealed in 2004 that it planned to push into China, but there has been no definite news since. A source familiar with developments said that talks with HomeWay have been going on for some time and believed a deal was likely by the end of the year, if not earlier. The terms and structure of any deal are not known.
HomeWay, founded in 1996 by tycoon Du Sha, has 14 stores in northern China and claims to have been the first Western-style DIY warehouse business to open in the country.
Mulcahy was appointed an independent director of Home World last year, along with Malcolm Raycraft, ex-chief executive of Tesco's Thailand arm. Former Home Depot vice-president of strategic planning Jim Inglis is also a director. The appointments prompted speculation that Du Sha aimed to pull off a deal with a big Western store group.
Last month, Home Depot chief executive Bob Nardelli ruled out European expansion - and the acquisition of Kingfisher - and said his main focus was on China. B&Q has 52 stores in the country already, generating sales of£312.8 million last year. One DIY sector source said that China was such a big market that the two arch-rivals would be able to co-exist for some time.
Home Depot and HomeWay both declined to comment. Mulcahy was not contactable.