Government proposals to cut tax rebates on exports for some steel products have created further doubt in the stock market at a time when share prices for most Chinese steel companies have been falling.

A possible cut in tax rebates is widely seen as an indication that the government wants to reduce China's trade surplus and alleviate trade conflicts.

Shares in Baosteel, China's largest steelmaker, fell 23 percent in two weeks on the Shanghai Stock Exchange before recovering on Monday to close at 8.7 yuan apiece. Handan Iron & Steel in Hebei Province also fell 11 percent in two weeks to close at 5.6 yuan on Monday. Meanwhile, the benchmark Shanghai Composite Index dropped 5 percent since last Tuesday to close at 2,807 on Monday.

"The rebate cut, which was triggered by international trade conflicts, contributed to a drop in the stock prices of steel firms," said Yang Baofeng, an analyst at Orient Securities. 

However, Yang and other stock analysts remain confident about the longer term prospect of steel companies' shares because of the expected increase in the steel price.

"The impact of the cut will soon wear off due to rising international steel spot prices, " Yang said.

The Chinese government reportedly plans to reduce tax rebates on the export of selected steel products from 11 percent to 5 percent, while completely removing rebates on steel wires and plates. Details of the plan have yet to be announced by the government, but they are widely expected to be released in the first half of this year.

Reports on the rebate cuts came at a time when the stock market was hit by a wave of profit taking. It was another blow to many steel shares, the analysts said.

"The effect of overall correction from the overheated stock market triggered a slump in steel stocks. Prices of some steel companies had gone too high," said Gu Yaoqiang, an analyst at Haitong Securities.

The latest fall in shares could make steel companies more appealing to investors who believe that rising prices for the metal could boost profits for some producers.

Wuhan Steel Processing Co Ltd and Angang Steel Company Limited recently raised their spot steel prices for March by about 5 percent in line with rising international prices.

Yang predicted that stock price weakness would be short term.

Analysts at CITIC Securities agreed and said that the rise of spot steel prices would raise the valuation of steel companies.

China's steel exports jumped 110 percent to 43 million tons, while imports fell 28 percent to 19 million tons in 2006. More than 60 percent of the exports went to the Republic of Korea, the European Union and the United States.

"The large steel price gap between the domestic market and the international market contributed to the increasing steel exports," said Luo Bingsheng, vice-chairman and secretary-general of the China Iron and Steel Association. Luo said that China's steel industry was often threatened by international anti-dumping complaints, but CISA continues to talk with international steel associations to relieve trade conflict. The nation adjusted tax rebates three times since 2005, including a reduction on some selected steel products from 11 percent to 8 percent last September.

"Steel exports in 2007 are expected to be lower or equal to the amount in 2006," Luo added.

(China Daily February 16, 2007)