Industry officials have appealed for Chinese authorities and businesses to stay cool about coal liquefaction.

"Although coal liquefaction promises to help ease China's oil shortage, huge potential risks are involved in its mass production," said Professor Lin Boqiang of Xiamen University.

Besides, unchecked growth of the sector would damage China's already deteriorating environment, analysts said.

Coal liquefaction sets high standards for coal resources, water resources, ecology, environment, technology and capital. Blind construction of such projects is unsustainable alongside the healthy development of the national economy, according to the NDRC.

Coal liquefaction soaks up water, and China -- especially its northern and northwestern regions -- is short of water. To develop coal liquefaction would intensify such inadequacy. Except for Yunnan and Guizhou provinces in Southwest China, most coal-rich provinces run short of water.

In addition to its massive water needs, coal liquefaction discharges waste gas, waste water and industrial effluent, creating significant environmental risks.

The profit margins of coal liquefaction projects are closely linked to the fluctuating international price of oil, which changes year to year. A coal liquefaction project takes three to five years to build and operate.

"Coal-for-oil technology will be economic if the crude oil price is higher than 25 U.S. dollars per barrel. In this sense, it will not face any risk in the near term," said Zhou Fengqi, a researcher with the Energy Institute of the NDRC's Macro-Economic Research Institute.

"But it is hard to tell whether coal liquefaction projects will certainly profit. If the international oil price plummets in the future, the nation will suffer a lot," said Zhou Fengqi.

Other industry experts worry that China's coal resources are not so rich: verified exploitable coal reserves were 188.6 billion tons at the end of 2002, but the average resource recovery rate was only 30 percent. Calculated at an annual coal output of 1.9 billion tons, the reserves would last only 30 years.

"In fact, investment in coal liquefaction incurs a high risk when the industry is still in its infancy. Coal liquefaction should spread only after the success of trial efforts," said Professor Lin Boqiang.

The NDRC concludes that in the five-year period from 2006 to 2010, or the 11th Five-Year Development Program period for China, the coal liquefaction industry should be developed smoothly and steadily.

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