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The government is considering cutting the import tax on steam coal to encourage imports which would help ease the shortfalls in coal supplies in southern China's.

The proposal, if acted upon, would bolster steam coal imports from countries such as Indonesia and Australia, albeit marginally.

This follows a slew of moves by the government to alleviate the stretched coal supply which it believes is a major bottleneck threatening the economy.

In the past two years, the government has poured billions of dollars into increasing coal production, enlarging transportation capacity, and restricting exports.

Wang Guangde, secretary-general of the China Coal Industry Association, confirmed that his association was studying a proposal to slash the tax on steam coal - the main fuel used in power generation.

"But nothing has been settled so far," said Wang in an interview on Friday.

Another official from the association said representatives from the Ministry of Finance arrived at the association on Thursday to discuss the proposal.

Early reports suggested the government may cut the import tax by as much as 4 per cent, from the current 6 per cent.

China imported 2 million tons of steam coal last year, and exported more than 60 million tons to cash in on the international price hike.

Users are reluctant to import steam coal which is about 100 yuan (US$12) a ton, or roughly 20 per cent more expensive than the domestic product.

Most of the steam coal is imported by power generators in southern areas, including Guangdong and Fujian provinces. Such areas have no coal reserves locally, and are far from coal production bases in northern regions. Therefore, they are forced onto the international market at those times the transportation network fails and coal needs are unmet.

Industry watchers have said the possible tax cut is a move to help power companies in southern areas reduce costs.

Cutting the import tax may help users in Guangdong lower costs by US$3-4 a ton, said a manager with China Coal and Coke Corp.

"Although it is still more expensive than purchasing coal on the domestic market in the north, the imports at least guarantee a stable supply," said the manager.

Analysts said the possible tax-cut will have a limited impact on the domestic coal market, given the meagre volume of the imports compared to total coal consumption. The 2 million tons of steam coal imported last year accounted for less than 1 per cent of the nation's total consumption.

Higher prices also discourage users from importing, analysts said.

"The tax-cut is conducive to helping alleviate shortages in coastal areas. But it will not decisively change the landscape of the domestic coal industry," said Zhang Wenxian, an industry analyst with Guotai Jun'an Securities Corp.

But rather than focusing on imports, some experts suggest more measures to curb exports to address domestic coal shortages.

China last year cut the steam coal export rebate from 13 per cent to 11 per cent.

The government also cut the coal export quota, most of which is for steam coal, to 80 million tons last year from 94 million tons in 2003.

The export quota will stay at 80 million tons this year.

These measures are sought to slow exports to make up for domestic shortfalls.

China has been squeezed by a tight coal supply since late 2003 when the demand from energy-heavy sectors such as the power and metallurgical industries, surged to feed China's galloping economic growth. Added to this was the continuing transportation bottleneck which served to exacerbate the strained situation.

China produced a record high of 1.9 billion tons of coal last year, a 15 per cent jump from 2003.

The growth, however, was just enough to fuel the 15 per cent growth in electricity generation last year.

Government officials have warned that China's coal shortfall is expected to worsen this year as supply continues to lag demand.

The country's coal consumption is set to rise by 120 million tons, or 6 per cent, this year to 2.1 billion tons. But the growth in production will not keep pace with consumption, officials said.