China's steel sector will embrace foreign investment prudently, although foreign steel giants are speeding up mergers and acquisitions (M&As) in China, an industry official told China Daily Wednesday.

Foreign investors will not be allowed to hold equity stakes in the parent firms of large-and-medium-sized Chinese steel makers, according to a national policy for the steel industry which will be issued soon, said Luo Bingsheng, vice-chairman of the China Iron and Steel Association.

Large-and-medium-sized Chinese steel producers affiliates, especially those listed on the stock market, will be permitted to transfer equity shares to foreign investors, Luo said.

"However, the Chinese side should hold the majority stakes in these affiliates," he said.

Leading Chinese steel makers could use their advantage in funds, technologies and management to lead in M&As of the steel sector, he said.

However, Mittal Steel, the world's biggest steel producer, is in merger talks with Kunming Iron and Steel Co Ltd in Yunnan Province, industry sources said.

In January, Mittal clinched a deal to acquire a 37.2 percent stake of Valin Iron and Steel Co Ltd, the Shenzhen-listed steel firm based in Hunan Province.

Arcelor, the world's second largest steel group, is also in merger negotiations with Qingdao Iron and Steel Holding Co Ltd in Shandong Province.

"Foreign steel giants now play a tiny role in China's steel sector. They intend to transfer their production capacity to China, as the nation is the world's biggest steel market and its steel demand will continue to grow steadily," said Cai Haihong, an analyst at China Merchants Securities Co Ltd.

"Our policy makers' prudent attitude towards foreign investment could be seen as their fear of excessive steel production capacity in China," Cai said.

(China Daily April 28, 2005)