China to allow wholly-owned foreign steel plants in four free trade zones

PUBLISHED : Tuesday, 19 July, 2016, 2:17pm
UPDATED : Tuesday, 19 July, 2016, 2:17pm

Beijing will allow foreign companies to set up wholly-owned steel manufacturing units in four pilot free trade zones, as part of a policy relaxation designed to attract foreign investment in various industries.

Foreign firms will no longer be subject to various qualification requirements and stake control restrictions when investing in China’s steel industry, according to a circular by the State Council posted on the central government’s website on Tuesday.

“The ban on foreign controlling shareholding and qualification hurdles imposed on foreign investors will be cancelled temporarily,” the circular said. “The establishment of foreign wholly-owned steel manufacturing firms will be allowed.”

Ultimately China wants to attract foreign investment to set up highly efficient firms to produce higher-end steel products
Argonaut Securities analyst Helen Lau

The relaxation applies to the pilot free trade zones in the municipalities of Shanghai and Tianjin, as well as Guangdong and Fujian provinces.

Regulations will be revised by the Ministry of Industry and Information Technology and other relevant authorities, it added.

The policy change comes a week after European manufacturers pressured European Union leaders at a bilateral summit in Beijing to take a tough stance with China on industrial overcapacity and the potential granting of market economy status to China later this year.

Thirty European industrial associations have accused Chinese manufacturers of dumping products, overbuilding production capacity and alleged Chinese central and local governments of giving “illegal” subsidies to manufacturers to expand capacities.

Under existing steel industry development policies, foreign steel firms that want to invest in China’s steel sector must own proprietary intellectual property rights, have annual general steel production capacity of more than 10 million tonnes, or at least 1 million tonnes of alloy special steel.

Foreign firms that are not already in the steel industry must have “strong capital strength and relatively high credibility” in order to invest in the Chinese steel sector, and must be able to provide supporting documentation from banks and accounting firms.

Foreign firms must also comply with government restrictions designed to limit new capacity, such that they can only invest in old mills, revamp projects, or invest in new plants while shutting down equivalent capacity in outdated facilities.

Despite China’s ranking as the world’s biggest consumer of steel and the home to the world’s biggest steel industry, foreign companies have only limited investment in a Chinese steel sector dominated by state-backed firms.

Luxembourg-based ArcelorMittal, the world’s largest steel maker, owns 10 per cent of Shenzhen-listed Hunan Valin Steel and has a 33 per cent stake in an automotive steel production joint venture with Hunan Valin.

Japan’s Nippon Steel & Sumitomo Metal Corp has a joint venture in Shanghai with Baoshan Iron & Steel to produce automotive steel, while South Korea’s Posco has a stainless steel joint venture in Shandong province.

Argonaut Securities metals and mining analyst Helen Lau said the policy is likely aimed at longer term considerations, even as China grapples with its severe over-capacity problem in the steel industry.

“Ultimately China wants to attract foreign investment to set up highly efficient firms to produce higher-end steel products ... this could help force Chinese firms to become more competitive and drive badly needed industry consolidation,” she said, adding that the free trade zones may provide attractive tax regimes for investment.

Land restrictions in the four pilot free trade zones would suggest that foreign firms are more likely to set up high-end processed products like steel alloys instead of general products that require more space, she added.