An official from the top policy-making body, the National Development and Reform Commission (NDRC), recently said China might halt coal-to-liquids (CTL) projects and stop ethanol production from corn.

Industry officials later said there would be no changes in projects by state-owned companies building CLT demonstration plants, while authorised fuel ethanol plants would not be required to stop churning out fuel ethanol from corn.

But analysts said the NDRC comment reflected a shift in Beijing's policy as droughts and pollution have led to hundreds of millions of people going without regular drinking water.

"If there's any issue that can destroy China's march forward, it's water," said Michael Komesaroff, managing director of Urandaline Investments.

"All the other issues, like social unrest, would feed into it. They want to manage the industries, particularly those that are polluting and consume large quantities of water," added Komesaroff, who specialises in China's capital-intensive industries.

Many private Chinese CTL and ethanol projects have sprouted in the past few years, helped by crude oil prices that have more than tripled in a five-year rally, in a rush to make domestic fuels such as such as diesel, naphtha or liquefied petroleum gas. China's crude imports reached record levels in April and it now relies on foreign barrels for about half its oil.

ABUNDANT COAL, SCARCE WATER

China, home to the world's third-largest known coal reserves, has taken a global lead in pushing new CTL projects, with state-owned Shenhua Group Corp. Ltd saying in April it would have an annual CTL capacity of as much as 30 million tonnes by 2020.

But some government officials are now questioning the drive, especially as it emerged the Shenhua's CTL plant in Inner Mongolia was costing more than 50 billion yuan (US$6.68 billion) -- a lot more than initially expected, analysts said.

There are worries the plant, which uses direct coal liquefaction (DCL) technology developed by Shenhua, would need even more water than more mature indirect coal liquefaction (ICL) technology used by South Africa's Sasol

James Brock, a Beijing-based energy consultant, said policy makers had told Shenhua not to expand the 1 million tonnes per year (tpy) Inner Mongolia plant to 5 million tpy before it proved the technology, including the amount of water it required.

Referring to Shenhua's claim that DCL needed less water than IDL, Brock said: "That's been challenged."

Analysts said the water problem was compounded by China's CTL projects being in the arid northwest of the country, such as Shaanxi and Ningxia provinces, which have abundant coal but little water.

Shenhua has said its DCL facility, the first such plant in the world, would need 1 tonne of water for producing 1 tonne of oil products, though Komesaroff calculated CTL had a much larger net water consumption after recycling of between 7-10 tonnes.

"Shenhua... will draw its annual requirement of 10 million tonnes of water from the Yellow River," he said. "Water levels in the upper reaches of the Yellow River have hit a historic low and officials have warned that China may run out of water by 2030."

FARMER COMPETITION

The Yellow River, China's second longest, supplies water to over 150 million people and irrigates 15 percent of the country's farmland. But in recent years, it has occasionally run dry before reaching the sea.

China's increasing wealth and growing population means it faces an uphill task in managing its already scarce water. The country is home to one-fifth of the world's population but has only 7 percent of its water resources.