China plans to restrict investment in its steel industry by barring foreign companies from taking controlling stakes, a blow to those wanting to tap the fast growing market.

The restrictions were contained in a new national steel industry policy due to be published next week, the China Daily said.

"Foreign steel producers must (also) have independent intellectual property in steelmaking technologies and have an annual output of 10 million tons," said Qi Xiangdong, deputy secretary general of China Iron and Steel Association.

As the world's largest producer of crude steel, the Chinese Government has spent billions of dollars on upgrading its steel makers such as Baosteel, currently the world's sixth largest.

It is now keen to improve the quality of the steel it makes as it lacks the technology to produce value-added high-quality steel. In much the same way it had done in the car industry, it wanted technological transfers, analysts said.

"The steel sector is one of the backbones of China's steadily-growing economy. Therefore, it should not be controlled by foreigners," Tian Shuhua, an analyst at China Galaxy Securities, said of the protectionist measures.

"Foreign steel giants could also accelerate technical collaborations with Chinese partners," Tian said.

The move comes as foreign players have stepped merger and acquisition activities in China, with Arcelor, a top European steelmaker, seeking control over China's Laiwu Iron and Steel.

To strengthen the domestic industry the government is planning to merge many of the fragmented sectors 871 steel producers, less than two percent of whom are capable of annual production above five million tons.

China, which was an insatiable importer of European steel during 2004, is becoming less dependent on imports as its own production comes on stream.

European companies have also been eager to move production to China and tap demand driven by an economy that is expected to grow at well over 9 percent in the first half of the year.

China's output of crude steel in the first five months of this year rose 27.4 percent to 136.2 million tons.

Source: Shenzhen Daily/Agencies