Required Report - public distribution

**Date:** 8/8/2006

**GAIN Report Number:** CH6049

CH6049

**China, Peoples Republic of**

**Bio-Fuels**

**An Alternative Future for Agriculture**

**2006**

**Approved by:**

![](media/image1.wmf)Maurice House

U.S. Embassy

**Prepared by:**

Kevin Latner, Caleb O\'Kray, Junyang Jiang

**Report Highlights:**

Ethanol production in 2005 was approximately 920,000 metric tons (MT),
with a production capacity of 1,020,000. Biodiesel production totaled
between 100,000 and 200,000 MT. China's current biofuel development
policies are to increase ethanol production to nearly 4 million MT by
2010 and meet 15 percent of China's transportation energy needs by 2020.
The ability of China to meet these objectives depends on competing uses
of inputs, including corn, wheat, rice, sugar, cassava, sweet sorghum
and oilseeds, and outputs, including sweetener, and alcohol.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Beijing \[CH1\]

\[CH\]

Table of Contents

[Executive Summary 3](#executive-summary)

[BIOFUELS: BACKGROUND 4](#biofuels-background)

[CHINA'S BIOFUEL SITUATION 5](#chinas-biofuel-situation)

[KEY OBJECTIVES: DEVELOPMENT, SECURITY, AND INTERNATIONAL RECOGNITION
5](#key-objectives-development-security-and-international-recognition)

[VEHICLE AND PETROLEUM MARKETS BOOM
5](#vehicle-and-petroleum-markets-boom)

[Higher disposable incomes make private vehicle ownership a possibility
5](#higher-disposable-incomes-make-private-vehicle-ownership-a-possibility)

[Vehicle growth a catalyst for petroleum expansion
6](#vehicle-growth-a-catalyst-for-petroleum-expansion)

[ETHANOL 7](#ethanol)

[Policies encourage quality production but limit growth
7](#policies-encourage-quality-production-but-limit-growth)

[Ethanol gets strict quality standards
10](#ethanol-gets-strict-quality-standards)

[Central government financial incentives make production viable
11](#central-government-financial-incentives-make-production-viable)

[Market floats on *flat* demand and supply
12](#market-floats-on-flat-demand-and-supply)

[Demand exclusively on the domestic front from national oil companies
12](#demand-exclusively-on-the-domestic-front-from-national-oil-companies)

[Ethanol supply from official producers; some hope for future ethanol
imports
12](#ethanol-supply-from-official-producers-some-hope-for-future-ethanol-imports)

[2005 production at 920,000 MT; 2010 target production at 4,000,000 MT
12](#production-at-920000-mt-2010-target-production-at-4000000-mt)

[No current ethanol trade but the future hopeful
14](#no-current-ethanol-trade-but-the-future-hopeful)

[Domestic feedstock suppliers and importers come out on top
17](#domestic-feedstock-suppliers-and-importers-come-out-on-top)

[Corn 17](#corn)

[Sugar 18](#sugar)

[Wheat 18](#wheat)

[Lignocellulosic 19](#lignocellulosic)

[Cassava 19](#cassava)

[Sorghum 20](#sorghum)

[BIODIESEL 21](#biodiesel)

[Market Demand May Exceed Ethanol 21](#market-demand-may-exceed-ethanol)

[Present production very limited, though potential huge
21](#present-production-very-limited-though-potential-huge)

[Domestic production between 100,000 and 200,000 MT
21](#domestic-production-between-100000-and-200000-mt)

[Feedstock supply hard to come by 22](#feedstock-supply-hard-to-come-by)

[Rapeseed 22](#rapeseed)

[Animal Fats/Oils 22](#animal-fatsoils)

[Other possible sources 23](#other-possible-sources)

[BIOFUEL IMPACTS MAKE THE MARKET CAUTIOUS
23](#biofuel-impacts-make-the-market-cautious)

[Economic Loss and Instability 23](#economic-loss-and-instability)

[Food Security Concerns 24](#food-security-concerns)

[Import/Export shifts 25](#importexport-shifts)

[ALCOHOL 25](#alcohol)

[SWEETENERS 26](#sweeteners)

[Appendix I: List of Kyoto Protocol Annex-I Countries
26](#appendix-i-list-of-kyoto-protocol-annex-i-countries)

[Appendix II: Tariff Schedule for Biofuel & Biofuel-Related-Commodity
Imports
26](#appendix-ii-tariff-schedule-for-biofuel-biofuel-related-commodity-imports)

[Appendix III: List of Harmonized Tariff Schedule Abbreviations and
Codes
28](#appendix-iii-list-of-harmonized-tariff-schedule-abbreviations-and-codes)

# Executive Summary

# 

Strict government regulation and control, to the exclusion of private
industry, characterizes biofuel development in China. While a relatively
fledgling industry, the biofuel market has policies and standards in
place and clear government objectives for future development: biofuels
will meet 15 percent of China's transportation energy needs by 2020. The
ability of China to meet these objectives depends on competing uses of
inputs, including corn, wheat, rice, sugar, cassava, sweet sorghum and
oilseeds, and outputs, including sweetener, and alcohol.

China produces two types of biofuels, fuel ethanol and biodiesel. Over
the past two decades, China has encouraged research and development,
legislation, and a phased introduction of biofuels to the industry and
consumers. Through subsidies and other financial mechanisms, the central
government encouraged biofuel development. As a result of biofuel
development, China has also benefited from international recognition of
the possible environmental benefits from lowered emissions and clean
development projects.

Increased development of biodiesel is an expected result of the diesel
market in China being twice that of gasoline. While the government has
been addressing ethanol for the past twenty years, it only began
including biodiesel in 2006 in its policy mix. The result is that while
strict fuel ethanol production standards are in place there are not
equivalent standards for biodiesel.

Ethanol production in 2005 was approximately 920,000 metric tons (MT),
with a production capacity of 1,020,000 metric tons. Biodiesel
production totaled between 100,000 and 200,000 MT. Under China's current
biofuel development policies, ethanol production should increase to
nearly 4 million MT by 2010.

China exports a small amount of fuel ethanol, but exports are likely to
decrease as it supplies increased domestic demand; due to high tariffs
and restrictive import policies, fuel ethanol imports are unlikely in
the short run. Feedstock imports for biofuel production will rise over
the next few years, however, to meet the increasing domestic demand of
fuel ethanol production.

Corn, sugar, oilseeds, sweet sorghum, wheat and cassava are likely to
take on new importance, as feedstock sources for ethanol. Efficiency and
cost will determine which feedstock sources will dominate the future
biofuel industry.

Biofuel development will impact on food self-sufficiency and food
security, which has slowed the Chinese government's development of the
biofuel sector.

# BIOFUELS: BACKGROUND

The Kyoto Protocol defines biofuels as gas or liquid fuel made from
plant material (biomass) or other waste: wood, wood waste, wood liquors,
peat, railroad ties, wood sludge, spent sulfite liquors, agricultural
water, straw, tires, fish oils, tall oil, sludge waste, waste alcohol,
municipal solid waste, landfill gases, other waste, and ethanol blended
into motor petroleum.

The principle economically viable biofuels are ethanol and biodiesel.
Others exist, but production is costly and technical production
limitations limit their market potential.

Ethanol has three principal venues: the energy market, the alcohol
market, and the chemical market. Ethanol (ethyl alcohol), depending upon
its market destination, is distilled and purified in varying degrees.
Purification and distilling standards differ by country. (China's
standards are listed in the Biofuels Standards section of this report.)
Industrial-grade ethanol is destined for the chemical market
(principally, chemical production and medicinal use). Food-grade ethanol
(undenatured ethanol), is destined for the alcohol market and is safe
for human consumption. Fuel-grade ethanol (fuel-ethanol, bioethanol, or
denatured ethanol) is distilled for the energy market to be blended with
gasoline. There are a variety of blending ratios for fuel-ethanol,
including E5 (gasoline that is 5% ethanol), E10 (10%), E85 (85%), and
E100 (100%). Prices tend to be directly related to the ethanol-blending
ratio and carbon emissions are inversely related to the blending ratio.
Ethanol production is technologically safe and simple.

There are three inputs for ethanol production:

1.  Grain-based feedstock (corn, wheat, rice, etc.)

2.  Non-grain-based (NGB) feedstock (cassava (tapioca), sugar (beets and
    cane), sweet sorghum, sweet potato)

3.  Cellulose (any organic matter: agricultural waste, grasses, sewage,
    sludge, switchgrass, plant stalks, trees---virtually anything that
    contains carbon)

Ethanol production plant technology is feedstock-specific. However, many
modern plants look towards feedstock flexibility and adaptation as ways
to increase productivity and efficiency.

The energy market is the sole venue for biodiesel. Biodiesel is a
mixture of long-chain fatty acid esters, conventionally manufactured
through trans-esterification of triacylglycerol (TAG, i.e. plant oil and
animal fats) with methanol, catalyzed by inorganic bases or acids. Just
as ethanol is blended with gasoline, biodiesel is blended with diesel
(or used directly in a diesel engine). Similar blending rates exist: B5,
B10, B85, and B100. In a like manner, prices tend to be directly related
to the biodiesel-blending ratio and carbon emissions are inversely
related to the blending ratio. Biodiesel production is technologically
more complex than ethanol production, but it is still fairly simple. Any
oil-based/fatty organic matter is an eligible source for biodiesel
production. Animal waste, soybeans, and oilseeds are typical stocks used
for biodiesel production. Large amounts of glycerol result as byproducts
of biodiesel production. Scientists have struggled for some time over
the efficient use of the byproduct. Popular belief is that glycerol can
be used for three purposes: material production (plastics and fibers),
thermal biomass combustion, and possibly as an alternative energy source
in and of itself. EU countries have relied principally on rapeseed for
biodiesel production. The US continues to rely on soybeans. Many Asian
countries are looking to their abundant palm oil.

National emphasis on different types of biofuel development depends on
the country's energy needs and long-term development strategy.

# CHINA'S BIOFUEL SITUATION

China views biofuels as an essential and strategic component of a secure
economy and diversified energy policy. To ensure development of
biofuels, the central government takes an active role in regulating both
the supply and demand sides of the biofuel market and has limited
ownership of production facilities to state industry. With a propensity
for command and control, the use of state-run industries to develop
biofuel insures the central government adequate "regulation." The
National Development and Reform Commission (NDRC) has been the leader in
the biofuel development arena, guiding future energy production and
consumption in China.

# KEY OBJECTIVES: DEVELOPMENT, SECURITY, AND INTERNATIONAL RECOGNITION

China's stated objectives for biofuel development are (1) the improving
of the welfare of Chinese rural citizens in China; (2) strengthening
China's energy security and reducing their oil dependence; (3) the
mitigation of emissions noxious to the environment. The subtext is (1)
farm support prices, (2) national security, and (3) membership and
recognition in the international community.

While Chinese coastal areas boom, growth in inland areas proceeds at a
much slower pace. Biofuel production is one of a series of programs to
mitigate rural poverty. With most plants located in the northeast,
currently ethanol provides an outlet for 10 percent of corn production
of northeastern provinces' (Jilin, Liaoning, Heilongjian, Hebei, and
Henan) corn production, particularly of low quality and older stocks,
and could add crops for biofuel production on otherwise marginal land.
With additional plants, Northwestern provinces (Xinjiang, Qinghai, Inner
Mongolia and Gansu) could increase their agricultural market by growing
sweet sorghum. With additional plants in southern China, the sugar cane,
cassava and Jatropha could be expanded to meet increased ethanol
production objectives.

In 1975 when China became a net importer of oil, energy security became
a concern. Now China depends on coal for 70% of its energy, with most of
the remainder fuel oil use for transportation. Consumption in this
sector is growing rapidly. Presently biofuels are approximately one
million metric tons (MT). China's policy objectives are produce 12
million MT of biofuels, including ethanol and biodiesel, annually by
2020, pushing it up to 15 percent of the nation's transportation fuel
use.

Taking leadership in the biofuel sector also fits into China's
aspirations to be a leader in the global arena as it uses biofuel to
reduce pollution and conserve its environmental assets, consistent with
the Kyoto Protocol objectives.

# VEHICLE AND PETROLEUM MARKETS BOOM

## Higher disposable incomes make private vehicle ownership a possibility

Over the past two decades, China's vehicle market has been the fastest
growing in the world. As disposable income increases, more and more
people in China are purchasing privately owned vehicles. According to
data from the National Bureau of Statistics of China, the number of
automobiles owned nationwide reached 26.94 million in 2004 (passenger
cars: 17.36 million; trucks: 8.93 million; others: 0.65 million). The
average growth rate between 1986 and 2004 was 11.8 percent. In Beijing
alone, authorities report 1,000 new cars are added each day to the
city's roads.

Mirroring Brazil's example (where 80 percent of passenger vehicles are
flex-fuel), Nanyang, a city in Henan province, is set to pilot a
flex-fuel transportation program in China. The city will experiment with
100 flex-fuel vehicles and 3-5 flex-fuel public transportation buses
from the EU. Future research and development will be based on this first
pilot program.

**Average Annual Growth Rate in Vehicle Ownership in Significant Regions
(1986-2004)**

![](media/image2.wmf)

The most significant vehicle ownership growth rates are occurring in the
coastal provinces and municipalities. These are the same provinces that
are experiencing the highest net economic growth rates.

**Number of Automobiles Owned in China and Changes in Annual Increase**

**(1986-2004)**

![](media/image3.png){width="5.930555555555555in"
height="4.083333333333333in"}

*Source: China Statistical Yearbook 2005 (First Edition)*

## 

## Vehicle growth a catalyst for petroleum expansion

China\'s consumption of crude oil totaled 323 million tons in 2005,
including net crude-oil imports of 119 million tons. Consistent with new
car use, the annual average growth rate for gasoline and diesel during
the period from 1990 to 2004 reached 6.8 percent and 10.1 percent
respectively. One of the significant reasons for the high diesel average
growth rate is the widespread use of public and private trucks. The
growth of farming trucks and mechanized farm equipment has contributed
to the diesel market's remarkable growth. Increasing bio-energy
production and consumption will help ease the country\'s oil shortage.

There is currently a gasoline import ban which was established 1999.
Gasoline consumption, principally for passenger vehicles, in 2004, was
50.35 million MT with an annual growth rate of 17.4 percent while
gasoline exports were 5.75 million MT, 28.3 percent lower than the
previous year. This trend is forecast to continue as high domestic
gasoline demand slowly eliminated exports.

**Changes** **in the Consumption of Gasoline and Diesel in China
(1980-2004)**

![](media/image4.wmf){width="6.09375in" height="3.9451388888888888in"}

#### 

*Source: China Statistical Yearbook and China Energy Statistical
Yearbook*

At the beginning of 2005, the Ministry of Finance and the State
Administration of Taxation announced their intention to temporarily
suspend the value-added tax rebate for gasoline, jet fuels and naphtha
exports, effective from September 1, 2005, to December 31, 2005, to
demonstrate the nation's policy of placing energy priority on internal
demand.

# 

# ETHANOL

## Policies encourage quality production but limit growth

The three phases of China's biofuel development are 1) research and
development of relevant technologies for biofuel production, accompanied
by a period of demonstration (1986-2001); 2) legislative infrastructure
(2001-2004); 3) enforcement, accompanied by pilot programs that
gradually expand, if successful (2004-present).

1.  Initial research centered on ethanol, biodiesel and fermented
    methane gas, under *the National High Technology Research and
    Development Initiative* (also known as *Plan 863*), which came into
    force in March 1986. Scientists at the Chinese Academy of Social
    Sciences led the research team. The focus was on six different
    sectors: telecommunications, biotechnology, energy, automation, new
    materials, and ocean development. Research on alcohol mixed
    transportation fuels was carried out under the auspices of China's
    Ministry of Science and Technology (MOST). The Tian Guan Group,
    based in Nanyang, Henan Province, launched a 200,000 tons ethanol
    production testing. A pilot program sprouted from this production in
    three Henan cities: Zhengzhou, Luoyang and Nanyang, in cooperation
    with the National Development and Reform Commission (NDRC) and the
    China Petroleum and Chemical Corporation (SINOPEC).

2.  Legislation---phase two---followed on April 2, 2001, when China
    released laws on *Denatured Fuel Ethanol* (GB18350-2001) and
    *Bioethanol gasoline for Automobiles* (GB18351-2001). These laws
    established standards for the production of E10. A year later on
    March 22, 2002, the government enforced the *Law Concerning Testing
    for the Use of Bioethanol Gasoline for Automobiles*, launching a
    model to introduce E10 into specified areas of China. The second
    phase of biofuel development established a legal system for biofuel
    (and for the relevant raw materials required) production,
    transportation and sales. The Bioethanol Utilization Plan was
    included in the 10^th^ Five-Year Plan (2001-2005).

3.  Following the pilot programs, on February 10, 2004, China announced
    its *Law Concerning Testing for the Extensive Use of Ethanol Blended
    Gasoline for Automobiles and the Regulations Concerning the Conduct
    of Testing for the Extensive Use of Ethanol Blended Gasoline for
    Automobiles*. This marked the beginning of phase three. All relevant
    conditions for extension of the pilot program made this incremental
    step forward possible. Logistics, sales, and production were all
    satisfactory at the small scale. The ethanol *Extensive Use Law*
    stipulates the following:

    a.  The establishment of an administrative system: China set up a
        special group to promote biofuel development, particularly the
        use of E10 for automobiles. NDRC would lead the group, while
        SINOPEC and China National Petroleum Corporation (CNPC) would be
        the subgroup leaders.

> **National Ethanol Promotion Team**

+--------------------+-------------------------------------------------+
| **Group**          | National Development and Reform Commission      |
| **Leader**         |                                                 |
+--------------------+-------------------------------------------------+
| **Subgroup         | China National Petroleum Corporation (CNPC)     |
| Leaders**          |                                                 |
|                    | China Petroleum and Chemical Corporation        |
|                    | (SINOPEC)                                       |
+--------------------+-------------------------------------------------+
| **Members**        | Ministry of Public Security                     |
|                    |                                                 |
|                    | Ministry of Finance                             |
|                    |                                                 |
|                    | Ministry of Commerce                            |
|                    |                                                 |
|                    | State Administration of Taxation                |
|                    |                                                 |
|                    | State Environmental Protection Administration   |
|                    | of                                              |
|                    |                                                 |
|                    | State Administration for Industry and Commerce  |
|                    |                                                 |
|                    | General Administration of Quality Supervision,  |
|                    | Inspection and Quarantine                       |
|                    |                                                 |
|                    | State Grain Administration                      |
+--------------------+-------------------------------------------------+

*Source: Law Concerning Testing for the Extensive Use of Ethanol*

b.  The establishment of an ethanol production system that incorporates
    financial incentives.

c.  Supplementary policies regarding adjustment, transportation and
    sales: the selling price for E10 is calculated by multiplying the
    shipping price of the 90# gasoline published by NDRC by a factor of
    0.9111. Hence the fluctuation range of the ethanol-selling price
    resembles that of traditional gasoline.

d.  Areas and terms: by the end of 2005, E10 products will have been
    made available throughout the regions of Heilongjiang, Jilin,
    Liaoning, Henan and Anhui Provinces. The central approach is to
    gradually introduce E10 to six cities in Hebei Province, seven
    cities in Shandong Province, five cities in Jiangsu Province, and
    nine cities in Hubei Province. (These regulations do not cover the
    military sector or the national special stockpiles.)

Although it has begun research on energy development through the use of
biomass, despite its pertinent role as the coordination point for
feedstock production (both grain-based feedstock and non-grain based
(NGB) feedstock), the Ministry of Agriculture does not participate in
the NDRC subcommittee on biofuels promotion. Food security is a more
important objective of MOA more than biofuel production.

In late 2006, China will release implementation plans of the biofuels
component of the 11^th^ Five-Year Period (2006-2010). Implementation
questions include whether China sets a national target for ethanol in
its national energy mix.

Ethanol producers' dependence on government subsidies will determine
industry growth. Ethanol subsidies have been declining and may be phased
out entirely by the end of the 11^th^ Five-Year Period. The policy
direction, articulated in a recent (May 2006) NDRC report, is to expand
supply by requiring ethanol use in State municipalities (Beijing,
Shanghai, and Tianjin) and expand demand through government sponsored
constructing of new ethanol production plants, including one in Guangxi
Province (cassava-based) and one in Hubei Province (rice-based).

The cost of fuel ethanol production cost is roughly \$563/MT (4,500
Yuan/MT), with stale grain as the raw material. The cost is
approximately \$500/MT (4,000 Yuan/MT) when using sweet sorghum or
cassava as raw materials. In China, fuel ethanol is profitable when oil
prices approach \$3.00/gallon (6 Yuan/liter). However, content
requirements and the influence of state owned purchasers of biofuel will
define demand.

China has launched sweet sorghum-based ethanol production on a trial
basis in Heilongjiang, Inner Mongolia, Shandong, Xinjiang and Tianjin.
Presently the trial project in Heilongjiang is capable of producing
5,000 MT of ethanol a year. Sorghum-based ethanol will remain in the
testing stages until technology and efficiency bring the product up to
par with competing raw materials. There is some question, however,
whether the domestic supply of sorghum, cassava, and sugarcane can meet
the demand to produce 30 million MT of fuel ethanol.

[]{.mark}

While there are many budding industries and sources of biomass energy in
China, in the long-term, economic feasibility will be the determining
factor. Whether the industries use corn, sugar, switchgrass, or
synthetic substances for biofuel production depends on what organic
source is most profitable.

In the foreseeable future, the government will dominate ethanol
development. Thus, while there are countless small private natural
ethanol production plants in China producing food grade alcohol, the
four fuel ethanol production plants are all run by state-owned
enterprises. By fiat, these producers can only sell their products to
SINOPEC and CNPC, the two state-run petroleum companies. SINOPEC and
CNPC then blend the ethanol with gasoline and distribute E10 to gas
stations. Over 95% of the gas stations in China are state-owned. Fuel
ethanol production is dominated by the government and will not be
influenced by public awareness or consumer demand in the short- and
medium-term.

### Ethanol gets strict quality standards

On April 18, 2001, the *Denatured Fuel Ethanol* and *Bioethanol Gasoline
for Automobile* national production technology standards were
established in order to set uniform, quality levels across the board.
Since the China Petroleum and Chemical Corporation (SINOPEC) and the
China National Petroleum Corporation (CNPC) regulated the distribution
and sales of the denatured ethanol, internal standards for blending,
storage and transportation of E10. Saccharification, fermentation and
additive standards are listed below, however.

> **Chinese Denatured Ethanol Standards**

+---------------------------+--------------------+---------------------+
| > **Item**                | **Standard**       | **Unit of           |
|                           |                    | Measurement**       |
+---------------------------+--------------------+---------------------+
| Appearance                | Clarification      |                     |
+---------------------------+--------------------+---------------------+
| Ethanol Content           | ≤ 92.1             | Vol%                |
+---------------------------+--------------------+---------------------+
| Methanol Content          | ≥ 0.5              | Vol%                |
+---------------------------+--------------------+---------------------+
| Actual Washed Gum         | ≥ 5.0              | mg/100ml            |
+---------------------------+--------------------+---------------------+
| Moisture Content          | ≥ 0.8              | Vol%                |
+---------------------------+--------------------+---------------------+
| Chlorine Ion              | ≥ 32.0             | mg/l                |
+---------------------------+--------------------+---------------------+
| Acidity                   | ≥ 56.0             | mg/l                |
+---------------------------+--------------------+---------------------+
| Copper Content            | ≥ 0.08             | mg/l                |
+---------------------------+--------------------+---------------------+
| pH Value                  | 6.5 -- 9.0         |                     |
+---------------------------+--------------------+---------------------+

> Note: the pH values prior to April 1, 2002, were 5.7 to 9.0.
>
> *Source: Denatured Fuel Ethanol (GB18350-2001)*
>
> **Chinese Ethanol Mixed with Gasoline Standards**

+---------------------------+---+------+------+------+--------------+
| > **Item**                | * |      |      |      | **Unit of    |
|                           | * |      |      |      | M            |
|                           | I |      |      |      | easurement** |
|                           | n |      |      |      |              |
|                           | d |      |      |      |              |
|                           | e |      |      |      |              |
|                           | x |      |      |      |              |
|                           | * |      |      |      |              |
|                           | * |      |      |      |              |
+---------------------------+---+------+------+------+--------------+
|                           |   | 90#  | 93#  | 95#  |              |
+---------------------------+---+------+------+------+--------------+
| Octane Number             | ≤ | 90   | 93   | 95   |              |
+---------------------------+---+------+------+------+--------------+
| Lead                      | ≥ | 0    |      |      | G/l          |
|                           |   | .005 |      |      |              |
+---------------------------+---+------+------+------+--------------+
| Distillation              | ≥ | 70   |      |      | ˚C           |
| Characteristics           |   |      |      |      |              |
|                           | ≥ | 120  |      |      | ˚C           |
| 10% distillation temp.    |   |      |      |      |              |
|                           | ≥ | 190  |      |      | ˚C           |
| *50% distillation temp.*  |   |      |      |      |              |
|                           | ≥ | 2    |      |      | Vol%         |
| *90% distillation temp.*  |   |      |      |      |              |
|                           |   |      |      |      |              |
| *Residual oil volume*     |   |      |      |      |              |
+---------------------------+---+------+------+------+--------------+
| Vapor Pressure            | ≥ | 88   |      |      | kPa          |
|                           |   |      |      |      |              |
| *Sept. 16 to Mar. 15*     | ≥ | 74   |      |      | kPa          |
|                           |   |      |      |      |              |
| *Mar. 16 to Sept. 15*     |   |      |      |      |              |
+---------------------------+---+------+------+------+--------------+
| Actual Gum                | ≥ | 5    |      |      | Mg/100ml     |
+---------------------------+---+------+------+------+--------------+
| Sulfur Content            | ≥ | 0.1  |      |      | \%           |
+---------------------------+---+------+------+------+--------------+
| Sulfuric Acid             | ≥ | 0    |      |      | \%           |
|                           |   | .001 |      |      |              |
+---------------------------+---+------+------+------+--------------+
| Copper Corrosion          | ≥ | 1    |      |      | 50˚C, 3h     |
+---------------------------+---+------+------+------+--------------+
| Moisture Content          | ≥ | 0.15 |      |      | \%           |
+---------------------------+---+------+------+------+--------------+
| Ethanol                   |   | 9.0  |      |      | Vol%         |
|                           |   | --   |      |      |              |
|                           |   | 10.5 |      |      |              |
+---------------------------+---+------+------+------+--------------+
| Benzene                   | ≥ | 2.5  |      |      | Vol%         |
+---------------------------+---+------+------+------+--------------+
| Aromatic Hydrocarbon      | ≥ | 40   |      |      | Vol%         |
+---------------------------+---+------+------+------+--------------+

*Source: Bioethanol Gasoline for Automobiles (GB18351-2001)*

### Central government financial incentives make production viable

According to the *Law Concerning Testing for the Extensive Use of
Ethanol Blended Gasoline for Automobiles and the Regulations Concerning
the Conduct of Testing for the Extensive Use of Ethanol Blended Gasoline
for Automobiles*, the following financial incentives are in place:

1.  Refund of value added taxes (appreciation duties).

2.  Five percent consumption tax on ethanol is exempted.

3.  Approximately \$12.50 (100 Yuan) in profit is guaranteed for each MT
    of ethanol.

4.  Grain reserve subsidies can be granted by supplying grain stocks on
    a preferential basis. Stock grain subsidies are determined by
    referencing market prices in each relevant area.

5.  The government will cover any loss incurred as a result of
    adjustment, transportation, or sale of E10. The Ministry of Finance
    will provide a specified amount of compensation.

The 2006 ethanol subsidy that the government provides producers is
\$172/MT (1,373 Yuan/MT), according to government reports, and China has
appropriated \$188 million (1.5 billion Yuan) in financial subsidies to
ethanol producers each year.

Before May 2006, all financial incentives and biofuel promotion were
limited strictly to ethanol. On May 30, 2006, the Ministry of Finance
published the *Interim Procedures for the Management of the Special
Development Fund for Renewable Energy Resources*. In these interim
procedures, the government outlines the creation of a special fund to
encourage the development of renewable energy resources. By renewable
energy resources, the procedure refers to wind energy, solar energy,
hydro-energy, biomass energy, geothermal energy and ocean energy. The
procedure focuses primarily on renewable alternatives to petroleum.
Biomass energy, in this context, extends beyond bioethanol to also
include biodiesel and biomass power generation and methane. Companies
can apply to the fund for capital to invest in research, development,
demonstration and production of these biofuels.

The Chinese Government recently prioritized biomass energy ahead of wind
power. This unprecedented change indicates that China is shifting its
focus of official support for renewable energy from wind power to
biomass energy. The Ministry of Finance and NDRC view biomass energy as
their top priority among sources of renewable energy.

The Chinese government is expected to enact new fiscal policies to
encourage the development of biomass energy from organic matter, in
hopes to spur R&D investment. The Ministry of Finance is deliberating a
cost-sharing and risk-sharing mechanism for biomass companies, by which
risk funds accumulated during times of high oil prices will be used to
compensate losses and sustain companies' operations if oil prices fall.

## 

## 

## Market floats on *flat* demand and supply

### 

### Demand exclusively on the domestic front from national oil companies

The demand for denatured ethanol is determined by central government
policies, including required production of E10 by the two national oil
companies and monthly demand quotas for each of the fuel ethanol
producers set by the oil companies.

Fuel ethanol demand would increase to approximately 5.5 million MT if
China were to require E10 for transportation use nationwide. Two
constraints limit this. Limited land constrains China's grain-based
feedstock production. While has shift research and development to NGB
feedstock for ethanol production, including sweet sorghum, cassava, and
sugar, resource limitations will force China to increase imports of
inputs as biofuel production increases

### Ethanol supply from official producers; some hope for future ethanol imports

#### 2005 production at 920,000 MT; 2010 target production at 4,000,000 MT

Presently there are four fuel ethanol production plants in China. Due to
increased government interest in biofuels, most provincial governments
are considering constructing their own production plants. There are also
three new production plants in the construction phase.

**Current and Future** **Denatured Ethanol Production**

+--------+-----------+-------+---------+---------+----------+-------+
| **Loca | **Company | *     | *       | *       | **Supply | **S   |
| tion** | Name**    | *Prin | *Actual | *2007** | Lo       | upply |
|        |           | cipal | 2005    |         | cation** | Vol   |
| *(Pro  |           | F     | Produ   | **Pro   |          | ume** |
| vince, |           | eedst | ction** | duction |          |       |
| City)* |           | ock** |         | Cap     |          | *     |
|        |           |       | *(MT    | acity** |          | (MT/y |
|        |           |       | /year)* |         |          | ear)* |
+--------+-----------+-------+---------+---------+----------+-------+
| H      | China     | Corn  | 100,000 | 100,000 | Heil     | 10    |
| eilong | Resources |       |         |         | ongjiang | 0,000 |
| jiang, | Alcohol   |       |         |         |          |       |
|        | Co.       |       |         |         |          |       |
| Zh     |           |       |         |         |          |       |
| aodong |           |       |         |         |          |       |
+--------+-----------+-------+---------+---------+----------+-------+
| Jilin, | Jilin     | Corn  | 300,000 | 600,000 | Jilin    | 10    |
| Jilin  | Fuel      |       |         |         |          | 0,000 |
|        | Ethanol   |       |         |         |          |       |
|        | Co.       |       |         |         |          |       |
+--------+-----------+-------+---------+---------+----------+-------+
|        |           |       |         |         | Liaoning | 20    |
|        |           |       |         |         |          | 0,000 |
+--------+-----------+-------+---------+---------+----------+-------+
| Henan, | Henan     | Wheat | 200,000 | 200,000 | Henan    | 8     |
| N      | Tian Guan |       |         |         |          | 6,842 |
| anyang | Fue       |       |         |         |          |       |
|        | l-Ethanol |       |         |         |          |       |
|        | Co.       |       |         |         |          |       |
+--------+-----------+-------+---------+---------+----------+-------+
|        |           |       |         |         | Hubei (9 | 11    |
|        |           |       |         |         | cities)  | 3,158 |
+--------+-----------+-------+---------+---------+----------+-------+
|        |           |       |         |         | Hebei (4 |       |
|        |           |       |         |         | cities)  |       |
+--------+-----------+-------+---------+---------+----------+-------+
| Anhui, | Anhui     | Corn  | 320,000 | 320,000 | Anhui    | 10    |
| Bengbu | BBCA      |       |         |         |          | 0,000 |
|        | Bi        |       |         |         |          |       |
|        | ochemical |       |         |         |          |       |
|        | Co.       |       |         |         |          |       |
+--------+-----------+-------+---------+---------+----------+-------+
|        |           |       |         |         | Shandong | 22    |
|        |           |       |         |         | (7       | 0,000 |
|        |           |       |         |         | cities)  |       |
+--------+-----------+-------+---------+---------+----------+-------+
|        |           |       |         |         | Jiangsu  |       |
|        |           |       |         |         | (5       |       |
|        |           |       |         |         | cities)  |       |
+--------+-----------+-------+---------+---------+----------+-------+
|        |           |       |         |         | Hebei (2 |       |
|        |           |       |         |         | cities)  |       |
+--------+-----------+-------+---------+---------+----------+-------+
| G      | China     | Ca    | 0       | 110,000 | Guangxi  | 11    |
| uangxi | Resources | ssava |         |         |          | 0,000 |
|        | Alcohol   |       |         |         |          |       |
|        | Co.       |       |         |         |          |       |
+--------+-----------+-------+---------+---------+----------+-------+
| Hebei  | China     | Sweet | 0       | 230,000 | Hebei    | 23    |
|        | Resources | po    |         |         |          | 0,000 |
|        | Alcohol   | tato, |         |         |          |       |
|        | Co.       | corn  |         |         |          |       |
|        |           | et    |         |         |          |       |
|        |           | al.   |         |         |          |       |
+--------+-----------+-------+---------+---------+----------+-------+
| Hubei  | Tian Guan | Rice  | 0       | 100,000 | Hubei    | 10    |
|        | Fue       |       |         |         |          | 0,000 |
|        | l-Ethanol |       |         |         |          |       |
|        | Co.       |       |         |         |          |       |
+--------+-----------+-------+---------+---------+----------+-------+
| ***Tot |           |       | 920,000 | 1,      |          |       |
| al:*** |           |       |         | 660,000 |          |       |
+--------+-----------+-------+---------+---------+----------+-------+

Note 1: Jilin will reach full production capacity in late 2007. It is
planning to increase its production to 1,000,000 MT/year by 2010.

Note 2: Guangxi will begin production in October of 2007. The plant
should reach full capacity (1,000,000 MT/year) by 2010. It will then
supply all of southern China: Yunnan, Guizhou, Guangdong, Hong Kong, and
Macao.

Note 3: Hebei will begin production in November of 2007. It will reach
its full capacity (300,000 MT/year) in 2008.

Note 4: The list of cities for each province runs as follows:

> **Hubei**: Xiangfan, Jingmen, Suizhou, Xiaogan, Shiyan, Wuhan,
> Wichang, Huangshi, and Ezhou
>
> **Hebei**: Shijiazhuang, Baoding, Xingtai, and Handan (locations
> supplied by Henan)
>
> **Shandong**: Jinan, Heze, Zaozhuang, Linyi, Lioacheng, Jining, and
> Tai'an
>
> **Jiangsu**: Xuzhou, Lianyugang, Huai'an, Yancheng, and Suqian
>
> **Hebei**: Canzhou and Hengshui (locations supplied by Anhui)

Note 5: The final three plants are not yet official: they cannot receive
government subsidy or supply SINOPEC or CNPC.

Source: Law Concerning Testing for the Extensive Use of Ethanol Blended
Gasoline for Automobiles and the Regulations Concerning the Conduct of
Testing for the Extensive Use of Ethanol Blended Gasoline for
Automobiles

**An historical look at China's ethanol production**

  ----------------------- -----------------------------------------------
  **Year**                **Production Quantity**

  2002 and before         Official fuel ethanol production began in 2004.
                          There is little recorded fuel ethanol
                          production before this time.

  2003                    \>20,000 MT/year

  2004                    300,000 MT/year

  2005                    920,000 MT/year

  Aggregate               \~1,220,000 MT/year
  ----------------------- -----------------------------------------------

**Locations of Ethanol Plants and E10 Pilot Ethanol Use Areas at the End
of** **2005**

![](media/image5.wmf){width="5.930555555555555in"
height="4.458333333333333in"}

*Source: Institute for Energy Economics, Chew Chong Siang*

The primary method of transporting ethanol from the plants to the two
major gasoline suppliers is via truck, and there is no official
discussion on alternative transportation methods. SINOPEC and CNPC blend
the ethanol and distribute it. The supply range differs according to
each production plant. Recent studies show that the optimized production
for a plant is 60,000 MT/year, incorporating feedstock harvest and
transportation to the plant, and ethanol distribution distances. The
smallest current ethanol producer, China Resources Alcohol Co. in
Heilonjiang, has a reasonable distribution range of 50-100 km.

#### No current ethanol trade but the future hopeful

China has been eyeing Brazilian fuel-ethanol for some time, and imports
could begin in the near future. Presently, the biofuel market is a
domestic one in most countries around the world. Only 10 percent of
biofuels produced in the world are sold internationally; Brazil accounts
for roughly half of those sales.

  ----------- ----------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
  **China                                                                                                               
  Ethanol                                                                                                               
  Export in                                                                                                             
  2001-2005                                                                                                             
  in 1,000                                                                                                              
  LTR**                                                                                                                 

  **HTS#**    **Description**   **2001**              **2002**   **2003**              **2004**              **2005**   

              Total Ethanol     249,422               115,248    284,101               96,912                162,204    

  220710      Undenatured       234,323               99,748     276,084               91,596                158,654    

  220720      Denatured         15,099                15,500     8,017                 5,316                 3,550      

  **China                                                                                                               
  Ethanol                                                                                                               
  Import                                                                                                                
  2001-2005                                                                                                             
  in 1,000                                                                                                              
  LTR**                                                                                                                 

  **HTS#**    **Description**   **2001**   **2002**                         **2003**              **2004**              **2005**

              Total Ethanol     455        3,558                            4,316                 4,253                 19,590

  220710      Undenatured       137        1,435                            2,258                 2,021                 15,936

  220720      Denatured         318        2,122                            2,058                 2,232                 3,654
  ----------- ----------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------

Source: China Customs data

**Net Ethanol Trade (2001-2005)**

![](media/image6.wmf)

  ------------- ------------- ---------- ---------- ---------- ---------- ----------
  **China                                                                 
  Ethanol                                                                 
  Export by                                                               
  Destination                                                             
  in 2001-2005                                                            
  in 1,000                                                                
  LTR**                                                                   

  **Rank**      **Country**   **2001**   **2002**   **2003**   **2004**   **2005**

  0             World         249,422    115,248    284,101    96,912     162,204

  1             Japan         151,310    81,971     152,755    49,975     79,375

  2             Korea, South  72,719     18,874     80,664     16,881     39,144

  3             Taiwan        10,741     10,177     26,363     21,909     22,655

  4             Korea, North  2,348      2,053      1,690      6,844      14,648

  5             Singapore     744        372        15,189     46         5,063

  6             Myanmar       667        623        734        417        309

                Others        10,894     1,179      6,707      840        1,010
  ------------- ------------- ---------- ---------- ---------- ---------- ----------

  ----------- -------------- ---------- ---------- ---------- ---------- ----------
  **China                                                                
  Ethanol                                                                
  Import by                                                              
  Origin                                                                 
  2001-2005                                                              
  in 1,000                                                               
  LTR**                                                                  

  **Rank**    **Country**    **2001**   **2002**   **2003**   **2004**   **2005**

  0           World          455        3,558      4,316      4,253      19,590

  1           South Africa   0          0          0          0          11,610

  2           Brazil         0          1,335      2,139      1          3,542

  3           Japan          52         1,765      1,827      1,900      1,807

  4           New Zealand    0          0          0          36         1,298

  5           Korea, South   40         21         24         40         992

  6           Australia      35         20         33         1,877      108

  7           Taiwan         87         134        109        114        103

  8           United States  15         9          31         25         35

  9           United Kingdom 17         29         32         9          31

  10          Germany        4          7          7          32         31

              Others         205        238        115        218        32
  ----------- -------------- ---------- ---------- ---------- ---------- ----------

### 

**Denatured Ethanol Imports and Exports (2001-2005)**

![](media/image7.wmf)

China began a trade deficit in denatured ethanol only this year. This
deficit will most likely continue as long as government policy
stipulates E10 use domestically.

###  

### Domestic feedstock suppliers and importers come out on top

#### Corn

China's fuel ethanol industry used corn as a feedstock for 80 percent of
its 2005 production and is forecast to use corn for 90 percent of its
2006 production. Henan's Tian Guan Group is the only plant to rely more
heavily on wheat for denatured ethanol production. If China continues to
rely on corn for bioethanol production, it could increase corn
consumption by 25 percent by the end of the decade, forcing the country
to import 10 million tons of corn a year by 2010. Corn consumption in
China would rise at an average of 5 percent a year, while corn used for
ethanol would increase at a rate of 10 percent a year.

The growth of corn use for industrial purposes may impact China's feed
industry during the upcoming years. Currently, the demand for corn from
China's feed industry stands at roughly 68 percent of the total demand,
forecast to reach 93 million MT in 2006/2007. Industrial consumption of
corn accounts for 20 percent of the total corn demand and is forecast to
reach 27.5 million tons in 2006/2007, up by 25 percent from 2005/2006.
Ethanol production accounts for 40 percent of the total industrial corn
use. If the government were to mandate E10 at the national level,
industry capacity would be lifted by at least 5 million MT. Any planned
increase in ethanol production will likely result in a higher demand for
corn. This could turn china from a net export of corn to a net importer.

+---------+--------+--------+--------+-------+-------+-------+------+
|         | *Re    | *Re    | *Re    | *Rev  | *Esti | *Fore | *    |
|         | vised* | vised* | vised* | ised* | mate* | cast* | UOM* |
+---------+--------+--------+--------+-------+-------+-------+------+
| ###     | USDA   | USDA   | USDA   | USDA  | USDA  | USDA  |      |
| ##### * | Of     | Of     | Of     | Off   | Off   | Off   |      |
| *CORN** | ficial | ficial | ficial | icial | icial | icial |      |
+---------+--------+--------+--------+-------+-------+-------+------+
| *       | 1      | 1      | 1      | 10    | 10    | 10    | MM/  |
| *Market | 0/2001 | 0/2002 | 0/2003 | /2004 | /2005 | /2006 | YYYY |
| Year    |        |        |        |       |       |       |      |
| Begin** |        |        |        |       |       |       |      |
+---------+--------+--------+--------+-------+-------+-------+------+
| Area    | 24282  | 24634  | 24068  | 25446 | 26800 | 27000 | (    |
| Ha      |        |        |        |       |       |       | 1000 |
| rvested |        |        |        |       |       |       | HA)  |
+---------+--------+--------+--------+-------+-------+-------+------+
| Be      | 102372 | 84788  | 64973  | 44852 | 36555 | 35000 | (    |
| ginning |        |        |        |       |       |       | 1000 |
| Stocks  |        |        |        |       |       |       | MT)  |
+---------+--------+--------+--------+-------+-------+-------+------+
| Pro     | 114088 | 121300 | 115830 | 1     | 1     | 1     | (    |
| duction |        |        |        | 30290 | 39370 | 38000 | 1000 |
|         |        |        |        |       |       |       | MT)  |
+---------+--------+--------+--------+-------+-------+-------+------+
| TOTAL   | 39     | 29     | 2      | 2     | 75    | 100   | (    |
| Mkt.    |        |        |        |       |       |       | 1000 |
| Yr.     |        |        |        |       |       |       | MT)  |
| Imports |        |        |        |       |       |       |      |
+---------+--------+--------+--------+-------+-------+-------+------+
| Oct-Sep | 39     | 29     | 2      | 2     | 75    | 100   | (    |
| Imports |        |        |        |       |       |       | 1000 |
|         |        |        |        |       |       |       | MT)  |
+---------+--------+--------+--------+-------+-------+-------+------+
| Oct-Sep | 20     | 0      | 1      | 2     | 0     | 0     | (    |
| Import  |        |        |        |       |       |       | 1000 |
| U.S.    |        |        |        |       |       |       | MT)  |
+---------+--------+--------+--------+-------+-------+-------+------+
| TOTAL   | 216499 | 206117 | 180805 | 1     | 1     | 1     | (    |
| SUPPLY  |        |        |        | 75144 | 76000 | 73100 | 1000 |
|         |        |        |        |       |       |       | MT)  |
+---------+--------+--------+--------+-------+-------+-------+------+
| TOTAL   | 8611   | 15244  | 7553   | 7589  | 4000  | 4000  | (    |
| Mkt.    |        |        |        |       |       |       | 1000 |
| Yr.     |        |        |        |       |       |       | MT)  |
| Exports |        |        |        |       |       |       |      |
+---------+--------+--------+--------+-------+-------+-------+------+
| Oct-Sep | 8611   | 15244  | 7553   | 7589  | 4000  | 4000  | (    |
| Exports |        |        |        |       |       |       | 1000 |
|         |        |        |        |       |       |       | MT)  |
+---------+--------+--------+--------+-------+-------+-------+------+
| Feed    | 94000  | 96000  | 97000  | 98000 | 1     | 1     | (    |
| Dom.    |        |        |        |       | 01000 | 03000 | 1000 |
| Cons    |        |        |        |       |       |       | MT)  |
| umption |        |        |        |       |       |       |      |
+---------+--------+--------+--------+-------+-------+-------+------+
| TOTAL   | 123100 | 125900 | 128400 | 1     | 1     | 1     | (    |
| Dom.    |        |        |        | 31000 | 37000 | 41000 | 1000 |
| Cons    |        |        |        |       |       |       | MT)  |
| umption |        |        |        |       |       |       |      |
+---------+--------+--------+--------+-------+-------+-------+------+
| Ending  | 84788  | 64973  | 44852  | 36555 | 35000 | 28100 | (    |
| Stocks  |        |        |        |       |       |       | 1000 |
|         |        |        |        |       |       |       | MT)  |
+---------+--------+--------+--------+-------+-------+-------+------+
| TOTAL   | 216499 | 206117 | 180805 | 1     | 1     | 1     | (    |
| DISTR   |        |        |        | 75144 | 76000 | 73100 | 1000 |
| IBUTION |        |        |        |       |       |       | MT)  |
+---------+--------+--------+--------+-------+-------+-------+------+

The area planted for Chinese corn will rise to around 27 million ha in
2006, up by approximately 1 percent from last year. Post forecast that
total corn output in 2006 be around 140 mmt, reaching a record level.
Favorable agricultural policy from the central government has helped
farmers' incomes and stimulated growth.

#### 

#### Sugar

Environmental concerns have dissuaded many plants from using sugarcane
and sugar beets for ethanol production. China's State Environmental
Protection Agency (SEPA) is carrying out environmental impact
assessments for all ethanol production technology. Due to inefficient
and wasteful production technologies, sugar for fuel ethanol production
is unlikely.

+--------+--------+--------+--------+-------+--------+--------+------+
|        | *Re    | *Re    | *Re    | *Rev  | *Est   | *For   | *    |
|        | vised* | vised* | vised* | ised* | imate* | ecast* | UOM* |
+--------+--------+--------+--------+-------+--------+--------+------+
| #      | USDA   | USDA   | USDA   | USDA  | USDA   | USDA   |      |
| ###### | Of     | Of     | Of     | Off   | Of     | Of     |      |
| ## **S | ficial | ficial | ficial | icial | ficial | ficial |      |
| UGAR** |        |        |        |       |        |        |      |
+--------+--------+--------+--------+-------+--------+--------+------+
| **     | 1      | 1      | 1      | 10    | 1      | 1      | MM/  |
| Market | 0/2001 | 0/2002 | 0/2003 | /2004 | 0/2005 | 0/2006 | YYYY |
| Year   |        |        |        |       |        |        |      |
| B      |        |        |        |       |        |        |      |
| egin** |        |        |        |       |        |        |      |
+--------+--------+--------+--------+-------+--------+--------+------+
| Beg    | 1004   | 869    | 2021   | 2323  | 1757   | 1407   | (    |
| inning |        |        |        |       |        |        | 1000 |
| Stocks |        |        |        |       |        |        | MT)  |
+--------+--------+--------+--------+-------+--------+--------+------+
| Beet   | 1090   | 1327   | 638    | 655   | 900    | 1100   | (    |
| Sugar  |        |        |        |       |        |        | 1000 |
| Prod   |        |        |        |       |        |        | MT)  |
| uction |        |        |        |       |        |        |      |
+--------+--------+--------+--------+-------+--------+--------+------+
| Cane   | 7215   | 10053  | 10096  | 9171  | 8700   | 10005  | (    |
| Sugar  |        |        |        |       |        |        | 1000 |
| Prod   |        |        |        |       |        |        | MT)  |
| uction |        |        |        |       |        |        |      |
+--------+--------+--------+--------+-------+--------+--------+------+
| TOTAL  | 8305   | 11380  | 10734  | 9826  | 9600   | 11105  | (    |
| Sugar  |        |        |        |       |        |        | 1000 |
| Prod   |        |        |        |       |        |        | MT)  |
| uction |        |        |        |       |        |        |      |
+--------+--------+--------+--------+-------+--------+--------+------+
| Raw    | 1234   | 710    | 1031   | 1172  | 1050   | 900    | (    |
| I      |        |        |        |       |        |        | 1000 |
| mports |        |        |        |       |        |        | MT)  |
+--------+--------+--------+--------+-------+--------+--------+------+
| R      | 141    | 132    | 204    | 188   | 350    | 200    | (    |
| efined |        |        |        |       |        |        | 1000 |
| Im     |        |        |        |       |        |        | MT)  |
| p.(Raw |        |        |        |       |        |        |      |
| Val)   |        |        |        |       |        |        |      |
+--------+--------+--------+--------+-------+--------+--------+------+
| TOTAL  | 1375   | 842    | 1235   | 1360  | 1400   | 1100   | (    |
| I      |        |        |        |       |        |        | 1000 |
| mports |        |        |        |       |        |        | MT)  |
+--------+--------+--------+--------+-------+--------+--------+------+
| TOTAL  | 10684  | 13091  | 13990  | 13509 | 12757  | 13612  | (    |
| SUPPLY |        |        |        |       |        |        | 1000 |
|        |        |        |        |       |        |        | MT)  |
+--------+--------+--------+--------+-------+--------+--------+------+
| Raw    | 9      | 10     | 10     | 12    | 10     | 10     | (    |
| E      |        |        |        |       |        |        | 1000 |
| xports |        |        |        |       |        |        | MT)  |
+--------+--------+--------+--------+-------+--------+--------+------+
| R      | 451    | 110    | 57     | 340   | 140    | 400    | (    |
| efined |        |        |        |       |        |        | 1000 |
| Exp.   |        |        |        |       |        |        | MT)  |
| (Raw   |        |        |        |       |        |        |      |
| Val)   |        |        |        |       |        |        |      |
+--------+--------+--------+--------+-------+--------+--------+------+
| TOTAL  | 460    | 120    | 67     | 352   | 150    | 410    | (    |
| E      |        |        |        |       |        |        | 1000 |
| XPORTS |        |        |        |       |        |        | MT)  |
+--------+--------+--------+--------+-------+--------+--------+------+
| Human  | 9355   | 10950  | 11600  | 11400 | 11200  | 11200  | (    |
| Dom.   |        |        |        |       |        |        | 1000 |
| Consu  |        |        |        |       |        |        | MT)  |
| mption |        |        |        |       |        |        |      |
+--------+--------+--------+--------+-------+--------+--------+------+
| Other  | 0      | 0      | 0      | 0     | 0      | 0      | (    |
| D      |        |        |        |       |        |        | 1000 |
| isappe |        |        |        |       |        |        | MT)  |
| arance |        |        |        |       |        |        |      |
+--------+--------+--------+--------+-------+--------+--------+------+
| Total  | 9355   | 10950  | 11600  | 11400 | 11200  | 11200  | (    |
| D      |        |        |        |       |        |        | 1000 |
| isappe |        |        |        |       |        |        | MT)  |
| arance |        |        |        |       |        |        |      |
+--------+--------+--------+--------+-------+--------+--------+------+
| Ending | 869    | 2021   | 2323   | 1757  | 1407   | 2002   | (    |
| Stocks |        |        |        |       |        |        | 1000 |
|        |        |        |        |       |        |        | MT)  |
+--------+--------+--------+--------+-------+--------+--------+------+
| TOTAL  | 10684  | 13091  | 13990  | 13509 | 12757  | 13612  | (    |
| DISTRI |        |        |        |       |        |        | 1000 |
| BUTION |        |        |        |       |        |        | MT)  |
+--------+--------+--------+--------+-------+--------+--------+------+

#### Wheat

Wheat is currently the principal feedstock source for fuel ethanol at
the Henan plant. There are three reasons wheat not likely to be a large
component in China's biofuel production: high domestic demand for food;
relatively low efficiency rate in ethanol production; government
policies away from the use of grain-based feedstock in ethanol
production.

+--------+--------+--------+--------+--------+--------+--------+-----+
|        | *Re    | *Re    | *Re    | *Re    | *Est   | *For   | *U  |
|        | vised* | vised* | vised* | vised* | imate* | ecast* | OM* |
+--------+--------+--------+--------+--------+--------+--------+-----+
| ###### | USDA   | USDA   | USDA   | USDA   | USDA   | USDA   |     |
| ## **W | Of     | Of     | Of     | Of     | Of     | Of     |     |
| HEAT** | ficial | ficial | ficial | ficial | ficial | ficial |     |
+--------+--------+--------+--------+--------+--------+--------+-----+
| **     | 0      | 0      | 0      | 0      | 0      | 0      | M   |
| Market | 7/2001 | 7/2002 | 7/2003 | 7/2004 | 7/2005 | 7/2006 | M/Y |
| Year   |        |        |        |        |        |        | YYY |
| B      |        |        |        |        |        |        |     |
| egin** |        |        |        |        |        |        |     |
+--------+--------+--------+--------+--------+--------+--------+-----+
| Area   | 24640  | 23910  | 22000  | 21626  | 22900  | 23500  | (1  |
| Har    |        |        |        |        |        |        | 000 |
| vested |        |        |        |        |        |        | HA) |
+--------+--------+--------+--------+--------+--------+--------+-----+
| Beg    | 91877  | 76588  | 60378  | 43293  | 38819  | 34972  | (1  |
| inning |        |        |        |        |        |        | 000 |
| Stocks |        |        |        |        |        |        | MT) |
+--------+--------+--------+--------+--------+--------+--------+-----+
| Prod   | 93873  | 90290  | 86490  | 91950  | 97450  | 105000 | (1  |
| uction |        |        |        |        |        |        | 000 |
|        |        |        |        |        |        |        | MT) |
+--------+--------+--------+--------+--------+--------+--------+-----+
| TOTAL  | 1092   | 418    | 3749   | 6747   | 1100   | 700    | (1  |
| Mkt.   |        |        |        |        |        |        | 000 |
| Yr.    |        |        |        |        |        |        | MT) |
| I      |        |        |        |        |        |        |     |
| mports |        |        |        |        |        |        |     |
+--------+--------+--------+--------+--------+--------+--------+-----+
| J      | 1092   | 418    | 3749   | 6747   | 1100   | 700    | (1  |
| ul-Jun |        |        |        |        |        |        | 000 |
| I      |        |        |        |        |        |        | MT) |
| mports |        |        |        |        |        |        |     |
+--------+--------+--------+--------+--------+--------+--------+-----+
| J      | 221    | 89     | 1466   | 1786   | 0      | 0      | (1  |
| ul-Jun |        |        |        |        |        |        | 000 |
| Import |        |        |        |        |        |        | MT) |
| U.S.   |        |        |        |        |        |        |     |
+--------+--------+--------+--------+--------+--------+--------+-----+
| TOTAL  | 186842 | 167296 | 150617 | 141990 | 137369 | 140672 | (1  |
| SUPPLY |        |        |        |        |        |        | 000 |
|        |        |        |        |        |        |        | MT) |
+--------+--------+--------+--------+--------+--------+--------+-----+
| TOTAL  | 1512   | 1718   | 2824   | 1171   | 1397   | 2000   | (1  |
| Mkt.   |        |        |        |        |        |        | 000 |
| Yr.    |        |        |        |        |        |        | MT) |
| E      |        |        |        |        |        |        |     |
| xports |        |        |        |        |        |        |     |
+--------+--------+--------+--------+--------+--------+--------+-----+
| J      | 1512   | 1718   | 2824   | 1171   | 1397   | 2000   | (1  |
| ul-Jun |        |        |        |        |        |        | 000 |
| E      |        |        |        |        |        |        | MT) |
| xports |        |        |        |        |        |        |     |
+--------+--------+--------+--------+--------+--------+--------+-----+
| Feed   | 9000   | 6500   | 6000   | 4000   | 3500   | 4000   | (1  |
| Dom.   |        |        |        |        |        |        | 000 |
| Consu  |        |        |        |        |        |        | MT) |
| mption |        |        |        |        |        |        |     |
+--------+--------+--------+--------+--------+--------+--------+-----+
| TOTAL  | 108742 | 105200 | 104500 | 102000 | 101000 | 101000 | (1  |
| Dom.   |        |        |        |        |        |        | 000 |
| Consu  |        |        |        |        |        |        | MT) |
| mption |        |        |        |        |        |        |     |
+--------+--------+--------+--------+--------+--------+--------+-----+
| Ending | 76588  | 60378  | 43293  | 38819  | 34972  | 37672  | (1  |
| Stocks |        |        |        |        |        |        | 000 |
|        |        |        |        |        |        |        | MT) |
+--------+--------+--------+--------+--------+--------+--------+-----+
| TOTAL  | 186842 | 167296 | 150617 | 141990 | 137369 | 140672 | (1  |
| DISTRI |        |        |        |        |        |        | 000 |
| BUTION |        |        |        |        |        |        | MT) |
+--------+--------+--------+--------+--------+--------+--------+-----+

#### Lignocellulosic

United States-based organic and natural food company SunOpta recently
announced that it is selling what will be the first cellulosic ethanol
plant in China. Cellulosic ethanol can be produced from basically any
organic matter (agricultural waste, grasses, sewage, sludge,
switchgrass, plant stalks, trees---virtually anything that contains
carbon), instead of solely from traditional feedstock (corn, wheat,
rice, sugar). Generally, cellulosic ethanol is not commercial viable,
but China will test this with the first cellulosic ethanol production
plant up and running by 2008. When viable, in China, most production
plants will retrofit current ethanol production plants for
lignocellulose production.

#### Cassava

The Guangxi Zhuang Autonomous Region in southern China plans to build a
fuel ethanol production facility capable of producing one million MT of
fuel ethanol by 2010. The plant is a joint venture between China
Resources Alcohol Co., a subsidiary of the China National Cereals, Oils
and Feedstuffs Corp. (COFCO), and SINOPEC. (COFCO holds 85 percent of
shares, while SINOPEC holds the remainder.) The plant is scheduled to
begin operations in October of 2007 at a production capacity of 110,000
MT per year. The initial output will supply Guangxi. When at maximum
capacity, the plant hopes to provide fuel ethanol to all of southern
China (Yunan, Guizhou, Guangdong, Hong Kong, and Macao), principally
using Cassava.

Total cassava production in China at present is estimated at 13.3
million MT. Guangxi already produces over 60 percent of China's total
cassava output. Cassava alone, some scholars predict, could supply as
much as 4 million MT of fuel ethanol in China. Production is estimated
to expand greatly in the next few years: Guangxi expects to expand its
acreage planted for cassava from 260,000 ha to over 660,000 ha. China
could grow cassava on 2.471 million acres of barren land, adding 21
million MT to the crop. Technological advances alone could help raise
yields by 7 million MT.

Thailand, the world's top cassava producer, already converts some of the
vegetable into fuel ethanol.

+----------+-------+-------+-------+-------+-------+-------+--------+
| ######   |       |       |       |       |       |       |        |
| China\'s |       |       |       |       |       |       |        |
|  Cassava |       |       |       |       |       |       |        |
|  (071410 |       |       |       |       |       |       |        |
| ) Import |       |       |       |       |       |       |        |
| s from t |       |       |       |       |       |       |        |
| he World |       |       |       |       |       |       |        |
|  by Metr |       |       |       |       |       |       |        |
| ic Ton 2 |       |       |       |       |       |       |        |
| 000-2005 |       |       |       |       |       |       |        |
+----------+-------+-------+-------+-------+-------+-------+--------+
|          | 2000  | 2001  | 2002  | 2003  | 2004  | 2005  | 2006   |
+----------+-------+-------+-------+-------+-------+-------+--------+
| **Total  | *     | **1   | **1   | **2   | **3   | **3   | 2,0    |
| I        | *256, | ,950, | ,760, | ,368, | ,442, | ,335, | 98,362 |
| mports** | 573** | 043** | 294** | 260** | 412** | 415** |        |
+----------+-------+-------+-------+-------+-------+-------+--------+
| Thailand | 6     | 1,62  | 1,42  | 1,87  | 2,73  | 2,69  | 1,4    |
|          | 1,411 | 9,870 | 5,371 | 4,362 | 4,389 | 5,576 | 44,795 |
+----------+-------+-------+-------+-------+-------+-------+--------+
| Vietnam  | 3     | 15    | 21    | 45    | 52    | 41    | 6      |
|          | 4,081 | 6,996 | 2,878 | 3,132 | 2,296 | 1,573 | 05,469 |
+----------+-------+-------+-------+-------+-------+-------+--------+
| I        | 16    | 16    | 12    | 4     | 18    | 22    | 48,098 |
| ndonesia | 1,080 | 3,155 | 2,040 | 0,766 | 5,728 | 8,265 |        |
+----------+-------+-------+-------+-------+-------+-------+--------+

Note: 2006 data is for January to May only.

Cassava imports into China are surging. The black market also explains
the surge in China's imports of tapioca chips from Thailand.

Henan's Tian Guan Group has entered into a contract with the government
of Laos, leasing 15 square km of land for the production of
cassava-based ethanol. The plant will ship the harvested cassava to
China for ethanol production.

#### Sorghum

Sweet sorghum, a native root plant from Africa, is a promising
alternative for fuel ethanol production. Sorghum can grow in areas of
drought. Once scientists finish research for sorghum-based ethanol
production, production could expand significantly.

+---------+--------+-------+-------+--------+--------+--------+-----+
|         | *Re    | *Rev  | *Rev  | *Re    | *Est   | *For   | *U  |
|         | vised* | ised* | ised* | vised* | imate* | ecast* | OM* |
+---------+--------+-------+-------+--------+--------+--------+-----+
| ######  | USDA   | USDA  | USDA  | USDA   | USDA   | USDA   |     |
| ## **SO | Of     | Off   | Off   | Of     | Of     | Of     |     |
| RGHUM** | ficial | icial | icial | ficial | ficial | ficial |     |
+---------+--------+-------+-------+--------+--------+--------+-----+
| *       | 1      | 10    | 10    | 1      | 1      | 1      | M   |
| *Market | 0/2001 | /2002 | /2003 | 0/2004 | 0/2005 | 0/2006 | M/Y |
| Year    |        |       |       |        |        |        | YYY |
| Begin** |        |       |       |        |        |        |     |
+---------+--------+-------+-------+--------+--------+--------+-----+
| Area    | 783    | 843   | 840   | 568    | 550    | 520    | (1  |
| Ha      |        |       |       |        |        |        | 000 |
| rvested |        |       |       |        |        |        | HA) |
+---------+--------+-------+-------+--------+--------+--------+-----+
| Be      | 130    | 161   | 143   | 247    | 156    | 141    | (1  |
| ginning |        |       |       |        |        |        | 000 |
| Stocks  |        |       |       |        |        |        | MT) |
+---------+--------+-------+-------+--------+--------+--------+-----+
| Pro     | 2722   | 3327  | 3300  | 2328   | 2300   | 2200   | (1  |
| duction |        |       |       |        |        |        | 000 |
|         |        |       |       |        |        |        | MT) |
+---------+--------+-------+-------+--------+--------+--------+-----+
| TOTAL   | 3      | 2     | 4     | 9      | 10     | 15     | (1  |
| Mkt.    |        |       |       |        |        |        | 000 |
| Yr.     |        |       |       |        |        |        | MT) |
| Imports |        |       |       |        |        |        |     |
+---------+--------+-------+-------+--------+--------+--------+-----+
| Oct-Sep | 3      | 2     | 4     | 9      | 10     | 15     | (1  |
| Imports |        |       |       |        |        |        | 000 |
|         |        |       |       |        |        |        | MT) |
+---------+--------+-------+-------+--------+--------+--------+-----+
| Oct-Sep | 0      | 0     | 0     | 0      | 0      | 0      | (1  |
| Import  |        |       |       |        |        |        | 000 |
| U.S.    |        |       |       |        |        |        | MT) |
+---------+--------+-------+-------+--------+--------+--------+-----+
| TOTAL   | 2855   | 3490  | 3447  | 2584   | 2466   | 2356   | (1  |
| SUPPLY  |        |       |       |        |        |        | 000 |
|         |        |       |       |        |        |        | MT) |
+---------+--------+-------+-------+--------+--------+--------+-----+
| TOTAL   | 19     | 88    | 80    | 28     | 25     | 20     | (1  |
| Mkt.    |        |       |       |        |        |        | 000 |
| Yr.     |        |       |       |        |        |        | MT) |
| Exports |        |       |       |        |        |        |     |
+---------+--------+-------+-------+--------+--------+--------+-----+
| Oct-Sep | 19     | 88    | 80    | 28     | 25     | 20     | (1  |
| Exports |        |       |       |        |        |        | 000 |
|         |        |       |       |        |        |        | MT) |
+---------+--------+-------+-------+--------+--------+--------+-----+
| Feed    | 685    | 765   | 775   | 400    | 400    | 200    | (1  |
| Dom.    |        |       |       |        |        |        | 000 |
| Cons    |        |       |       |        |        |        | MT) |
| umption |        |       |       |        |        |        |     |
+---------+--------+-------+-------+--------+--------+--------+-----+
| TOTAL   | 2675   | 3259  | 3310  | 2400   | 2300   | 2200   | (1  |
| Dom.    |        |       |       |        |        |        | 000 |
| Cons    |        |       |       |        |        |        | MT) |
| umption |        |       |       |        |        |        |     |
+---------+--------+-------+-------+--------+--------+--------+-----+
| Ending  | 161    | 143   | 57    | 156    | 141    | 136    | (1  |
| Stocks  |        |       |       |        |        |        | 000 |
|         |        |       |       |        |        |        | MT) |
+---------+--------+-------+-------+--------+--------+--------+-----+
| TOTAL   | 2855   | 3490  | 3447  | 2584   | 2466   | 2356   | (1  |
| DISTR   |        |       |       |        |        |        | 000 |
| IBUTION |        |       |       |        |        |        | MT) |
+---------+--------+-------+-------+--------+--------+--------+-----+

# BIODIESEL

## Market Demand May Exceed Ethanol

There is a rising demand for biodiesel since the diesel market is twice
that of the gasoline market. The principal difficulty is the lack of
eligible sources for biodiesel production. China is a net importer in
all the major edible vegetable oils, the largest importer in the world.
Coupled with the lack of fatty organic matter, the lack of land upon
which new crops could grow exacerbates the difficulty of biodiesel
production. As a result, China's ethanol production growth exceeds
biodiesel's. In May of 2006, China took some preliminary steps towards
biodiesel promotion by setting up a special development fund to
encourage research, development, and production. Biodiesel's future in
China relies on three key factors:

1.  Government support and NDRC defining a clear plan for expansion, not
    only for biodiesel production, but also for the harvesting of NGB
    crops.

2.  Research and development to solidify technologies for production

3.  Defining and obtaining key organic sources for production.
    Potentials inputs include rapeseed, Jatropha nuts, switchgrass,
    sunflower seeds, Chinese pistachio, peanuts, sesame seeds, Barbados
    nuts, Fufang vines, Yousha bean, and Chinese dogwood nuts.

## Present production very limited, though potential huge

### Domestic production between 100,000 and 200,000 MT

Biodiesel is in the very early phases of testing and development. The
*Wuhan Energy Oil Material and Biodiesel Engineering Technology Research
Center* and the *Hubei Energy Oil Material and Biodiesel Engineering
Technology Research Center* have been in the testing phase and will
begin a trial production of 2,000 MT of biodiesel each year. Wuhan Airui
Biodiesel Co. began producing 100,000 MT per year. Biodiesel production
from Jatropha, Chinese Pistachio and rapeseed has been limited and is
still in the testing phase. China plans to produce 2 million MT of
biodiesel by 2010.

Sichuan Gushan Grease Chemical Engineering Company is the only company
to use rapeseed oil to produce biodiesel: its capacity is 10,000 tons
per year.

Currently, about 80,000 tons of biodiesel are produced from waste
cooking oil. Fujian Gushan New Energy Comp Ltd is one of the larger
biodiesel producers in China: it has a capacity of around 40,000
tons/year. The company collects waste oil from Beijing and other big
cities.

Last year China purchased nearly 3 million tons or 75 percent of its
total palm oil imports from Malaysia. Various Chinese firms have
approached the Malaysian External Trade Development Corporation to
purchase palm oil waste for biodiesel production. In search of long-term
contracts, they were willing to pay \$200-250 per ton. Initial demand
from the various firms totalled 200,000 to 250,000 tons per year. The
exports could fetch up to \$62.5 million.

### Feedstock supply hard to come by

#### Rapeseed

Rapeseed is a promising oilseed for biodiesel and is a potential source
of biodiesel production for China. During the winter season, there are
currently over 29 million hectares left fallow in the central region of
China (in the regions surrounding the Yangtze River, the Yellow River,
and the Huai River). If rapeseed were planted in the off-season, and
established technology produces 0.64 tons of biodiesel per hectare
planted, the 29 million ha could be harvested and used for the
production of over 18.5 million MT of biodiesel.

  --------------- ----------- ----------- ----------- ----------- ------------ ------------ ---------
                  *Revised*   *Revised*   *Revised*   *Revised*   *Estimate*   *Forecast*   *UOM*

  **RAPE-SEED**   Post        Post        Post        Post        Post         Post         
                  Estimate    Estimate    Estimate    Estimate    Estimate     Estimate     
                  \[New\]     \[New\]     \[New\]     \[New\]     \[New\]      \[New\]      

  **Market Year   10/2001     10/2002     10/2003     10/2004     10/2005      10/2006      MM/YYYY
  Begin**                                                                                   

  Area Harvested  7095        7143        7220        7272        7250         7200         (1000 HA)

  Production      11331       10552       11420       13182       13050        12500        (1000 HA)

  MY Imports      775         51          419         316         650          800          (1000 MT)

  Total Supply    12106       10603       11839       13498       13700        13300        (1000 MT)

  MY Exports      1           4           1           0           0            0            (1000 MT)

  Crush Dom.      11405       10016       11248       12848       13010        12700        (1000 MT)
  Consumption                                                                               

  Feed, Seed,     700         583         590         650         690          600          (1000 MT)
  Waste Dom.                                                                                
  Consumption                                                                               

  TOTAL Dom.      12105       10599       11838       13498       13700        13300        (1000 MT)
  Consumption                                                                               

  TOTAL           12106       10603       11839       13498       13700        13300        (1000 MT)
  DISTRIBUTION                                                                              
  --------------- ----------- ----------- ----------- ----------- ------------ ------------ ---------

#### 

#### Animal Fats/Oils

Biodiesel from animal fats and oils, while a great potential for the
future, is not being explored at present. Cattle, poultry, swine, and
sheep may be sources of oils and fats explored for future biodiesel
production.

**Livestock in China**

![](media/image8.wmf)

#### Other possible sources

China is also exploring Jatropha and Chinese pistachios, other oil
plants, for potential biodiesel sources. Industry groups have recently
invested in Jatropha stands in east India. The trees take five years to
grow: the investment should turn itself around in a period of ten years
time. Projects to harvest Jatropha seeds are being considered in Guizhou
and Sichuan provinces. Technological advances are necessary for
Jatropha-based biodiesel production, however.

Plants such as sugar grass, which is suitable for salina (salt marsh)
and other low-quality land in 18 provincial areas north of the Yellow
River and Huaihe River basins, are also promising for biofuel
production. Such lands total 33.34 million hectares, and some
researchers suggest that one-fifth of them could be enough to produce 20
million MT of ethanol.

China is home to more than 1,500 types of oil plants, with over 30 of
them highly adaptable and widely distributed. China produces
approximately 1.5 billion tons of agricultural and food wastes and
residues each year, including 100 million MT of agricultural crop
stalks. These wastes have the potential of providing 50 million MT of
energy.

# BIOFUEL IMPACTS MAKE THE MARKET CAUTIOUS

Other concerns include food security, and dependence on the
international market.

## Economic Loss and Instability

Energy dependence has been the principle motivator behind national
bioenergy programs. These programs require government support and put
the break-even point at about \$40/barrel.

Most studies put the energy ratio for corn-based (most standard form at
present) ethanol production at 1:1.4---meaning that for every one unit
of energy spent, only 1.4 units of ethanol energy are created. Some
facilities don't meet this energy efficiency.

Ethanol will also require upgrades in the infrastructure. For example,
distribution pipelines need to be watertight, as ethanol is
water-soluble, but presently many are not.

### 

## Food Security Concerns

### 

If ethanol production remains as profitable as it is at present, the
cultivation of crops for ethanol could displace food crops, reducing
food production. The NDRC asserts that developing 6 million MT of
biofuel ethanol production within the context of the 11^th^ Five-Year
Plan will not threaten China's grain security. It will affect its
production mix and increase imports of inputs.

China has basically self-sufficient in food, but production is not
stable. Self-sufficiency has been over 98 percent in the 1960s and 1970s
and around 95 percent in the 1980s.

Reserves are supported by government subsidies and provide adequate food
security. According to the Food and Agriculture Organization (FAO)
guidelines, the food reserve safety line can be achieved if the crops in
stock account for 17-18 percent of the total consumption. Based on the
annual food consumption in 2003 of approximately 490 million MT in
China, the food reserve safety guidelines would stipulate roughly 125 MT
of food reserves. In fact, reserves are approximately 568.9 million MT
(388.9 million MT on farm and 180 million MT of government's stocks), 80
million MT more than the annual food consumption of the year. The 1980s
witnessed some difficult food conditions that led to a maximum of
approximately 20 million MT of annual imports.

**Changes in Food Production in China (1985-2003)**

![](media/image9.png){width="5.4875in" height="3.8875in"}

Source: China Statistical Yearbook 2004

## Import/Export shifts

### 

If biofuel production and consumption continues in China, China may soon
see a change in its trade balance. Already there has been a change in
trade trends in biofuel feedstock such as corn, wheat, sugar, and
cassava. China's corn exports will begin to diminish, and various
industry sources predict that China will become a net corn importer by
2008. China's wheat exports will also diminish with time. Cassava
imports from Southeast Asia, particularly Laos, Vietnam and Thailand
have increased greatly, thanks in large part to the booming ethanol
production industry. As fuel ethanol production pulls in traditional
sources of undenatured ethanol, sugar might grow as a stock for
undenatured ethanol. Sugar imports may grow as a result.

The Chinese government has emphatically denied any interest in exporting
fuel ethanol. As domestic demand grows, the little denatured ethanol
exports that there are will die off altogether (provided official policy
remain the same).

The international market can expect an increase in biofuel technology
and equipment imports into China. The government views technological
efficiency as a key component in its plan to pursue energy dependence
and forwards biofuel development.

# ALCOHOL

China has been exporting undenatured (food-grade ethanol) for some time.
Future exports depend upon domestic prices/demand and international
prices. If it becomes more economical to produce denatured ethanol, then
many companies will shift production away from undenatured ethanol
production. Likewise if demand from SINOPEC and CNPC falls, but
international prices for fuel ethanol remain high enough, producers will
increase output for the international market. Since the use of E10
became standard in many trials areas of China, exports have decreased.
This will more than likely be the trend for the near future.

Many manufactures still use sugar byproducts, molasses especially, for
undenatured (food-grade) ethanol production. It currently accounts for
20 percent of all undenatured ethanol production, some 600,000 MT/year.

**Raw Materials used for Food-Grade (Undenatured) Ethanol Production**

![](media/image10.wmf)

*(Units: MT/Year)*

Total Food Ethanol Amounts Produced:

2,000,000

From Molasses: 600,000

From Corn: 1,320,000

From domestic cassava: 30,000

From imported cassava: 78,000

# SWEETENERS

Cornstarch accounts for 85 percent of national total starch output. The
total corn used for starch manufacturing reached about 12 mmt in 2005,
up 15 percent from the previous year. Industrial and food processing
demands for starch will continue to grow in the coming years.

Cornstarch production in 2004 reached 8.6 million MT and in 2005 reached
9.9 million MT, according to China Starch Industry Association.
Cornstarch accounts for more than 90% of China's total starch
production. Due to high prices for sugar in China over the past two
years, cornstarch sweetener production in 2005 reached 4.2 million MT,
21 percent from the previous year. Starch sweetener production is
estimated to exceed 5 million MT in 2006.

+----------+----------+-----------+----------+----------+-----------+
| ####     |          |           |          |          |           |
| ### Chin |          |           |          |          |           |
| a\'s Sta |          |           |          |          |           |
| rch Impo |          |           |          |          |           |
| rts in 2 |          |           |          |          |           |
| 000-2004 |          |           |          |          |           |
+----------+----------+-----------+----------+----------+-----------+
| **Descr  | *        | **Jan-Dec | *        | *        | **Jan-Dec |
| iption** | *Jan-Dec | 2001**    | *Jan-Dec | *Jan-Dec | 2004**    |
|          | 2000**   |           | 2002**   | 2003**   |           |
+----------+----------+-----------+----------+----------+-----------+
| Starch   | 143      | 20        | 358      | 574      | 75        |
|          | ,027,520 | 5,401,202 | ,723,451 | ,843,562 | 6,546,679 |
+----------+----------+-----------+----------+----------+-----------+
| Starch   | 105      | 17        | 329      | 539      | 72        |
| (        | ,002,688 | 8,664,087 | ,007,257 | ,925,737 | 4,716,351 |
| cassava) |          |           |          |          |           |
+----------+----------+-----------+----------+----------+-----------+
| Starch   | 28       | 1         | 20       | 25       | 1         |
| (potato) | ,192,222 | 6,008,451 | ,035,221 | ,327,660 | 9,722,927 |
+----------+----------+-----------+----------+----------+-----------+
| Starches | 6        | 4,700,365 | 5        | 5        | 5,340,745 |
| (nesoi)  | ,019,117 |           | ,222,459 | ,609,875 |           |
+----------+----------+-----------+----------+----------+-----------+
| Starch   | 2        | 3,461,638 | 1        | 1        | 3,095,044 |
| (corn)   | ,468,930 |           | ,772,997 | ,120,627 |           |
+----------+----------+-----------+----------+----------+-----------+
| Starch   | 1        | 2,487,916 | 2        | 2        | 2,758,977 |
| (wheat)  | ,305,693 |           | ,629,917 | ,580,057 |           |
+----------+----------+-----------+----------+----------+-----------+
| Inulin   | 38,870   | 78,745    | 55,600   | 279,606  | 912,635   |
+----------+----------+-----------+----------+----------+-----------+

The price of corn-based starch has been relatively stable when compared
with sugar prices. In MY06/07, corn-based sweeteners will continue to be
competitive in the food-processing sector. The use of corn-based
sweeteners in 2005 was equivalent to about 3 MMT of cane sugar. The
sugar-byproduct molasses will continue to be an important feedstock for
food-grade ethanol production. The government does not regulate
food-grade ethanol production as it does fuel-grade ethanol. Undenatured
ethanol plants are far too numerous for government regulation. Besides,
production quantities tend to be minimal in comparison with the large
fuel ethanol production plant quotas.

# Appendix I: List of Kyoto Protocol Annex-I Countries

+-----------------+-----------------+-----------------+-----------------+
| Austria         | France          | Liechtenstein   | Slovakia        |
|                 |                 |                 |                 |
| Belgium         | Germany         | Luxembourg      | Spain           |
|                 |                 |                 |                 |
| Bulgaria        | Greece          | Monaco          | Sweden          |
|                 |                 | Netherlands     |                 |
| Canada          | Hungary         |                 | Switzerland     |
|                 |                 | New Zealand     |                 |
| Czech Republic  | Iceland         |                 | United Kingdom  |
|                 |                 | Norway          | of Great        |
| Denmark         | Ireland         |                 | Britain         |
|                 |                 | Poland          |                 |
| Australia       | Italy           |                 | and Northern    |
|                 |                 | Portugal        | Ireland         |
| Estonia         | Japan           |                 |                 |
|                 |                 | Romania         | United States   |
| Finland         | Latvia          |                 | of America      |
|                 |                 | Russian         |                 |
|                 |                 | Federation      |                 |
+-----------------+-----------------+-----------------+-----------------+

# 

# Appendix II: Tariff Schedule for Biofuel & Biofuel-Related-Commodity Imports

  ------------ --------------------- ---------- -------- ---------- --------- ---------- ---------- ---------
  **HS**       **Description**       **MFN%**   **CP**   **Gen%**   **VAT**   **Drawbk   **Unit**   **S&C**
                                                                              Low**                 

  17025000     Corn sweetener, solid 30                  80         17        13         kg         A
               (chemically pure                                                                     
               fructose)                                                                            

  17026000     Corn sweetener,       30                  80         17        13         kg         BA
               liquid (other                                                                        
               fructose and fructose                                                                
               syrup, containing in                                                                 
               the dry state more                                                                   
               than 50 percent by                                                                   
               weight of fructose,                                                                  
               excluding invert                                                                     
               sugar)                                                                               

  22071000     Ethanol, undenatured, 30         10       80         17        13         ltr/kg     7ABG
               regardless of                                                                        
               feedstock,                                                                           
               (\"undenatured ethyl                                                                 
               alcohol of an                                                                        
               alcoholic strength by                                                                
               volume of 80% vol. or                                                                
               higher\")                                                                            

  22072000     Ethanol, denatured,   30         10       80         17        13                    
               regardless of                                                                        
               feedstock, (\"ethyl                                                                  
               alcohol and other                                                                    
               spirits, denatured)                                                                  

  22072010     Ethanol, denatured,   30         10       80         17        13                    ABG
               regardless of                                                                        
               feedstock, (\"ethyl                                                                  
               alcohol, denatured of                                                                
               any strength\")                                                                      

  22072090     Ethanol, denatured,   30         10       80         17        13                    ABG
               regardless of                                                                        
               feedstock, (\"other                                                                  
               spirits, of any                                                                      
               strength\")                                                                          

  38249040     Polymethyl polyphenyl 6.5        6        35         17        13                    
               isocyanates                                                                          
               (poly-MDI)                                                                           

  10051000     Seed (corn)           20                  180        13        13         kg         

  1005100010   Maize (corn) seed     1                   180        13        13         kg         4xAByt
               (in-quota)                                                                           

  1005100090   Maize (corn) seed     20                  180        13        13         kg         4xABy
               (out-of-quota)                                                                       

  10059000     Other types of corn   65                  180        13        13         kg         

  1005900010   Other maize (corn)    1                   180        13        13         kg         4xAByt
               (in-quota)                                                                           

  1005900090   Other maize (corn)    65                  180        13        13         kg         4xABy
               (out-of-quota)                                                                       

  11081200     Maize (corn) starch   20                  50         17        13         kg         AB

  10011000     Durum wheat           65                  180        13        13         kg         

  1001100010   Durum wheat           1                   180        13        13         kg         4xABty
               (in-quota)                                                                           

  1001100090   Durum wheat           65                  180        13        13         kg         4xABy
               (out-of-quota)                                                                       

  10019010     Seed (wheat)          65                  180        13        13         kg         

  1001901010   Wheat, seed           1                   180        13        13         kg         4xABty
               (in-quota)                                                                           

  1001901090   Wheat, seed           65                  180        13        13         kg         4xABy
               (out-of-quota)                                                                       

  10019090     Other                 65                  180        13        13         kg         

  **HS**       **Description**       **MFN%**   **CP**   **Gen%**   **VAT**   **Drawbk   **Unit**   **S&C**
                                                                              Low**                 

  1001909010   Other wheat and       1                   180        13        13         kg         4xABty
               maslin (in-quota)                                                                    

  1001909090   Other wheat and       65                  180        13        13         kg         4xABy
               maslin (out-of-quota)                                                                

  12129100     Sugar beet:           20                  70         13        5          kg         AB

  12129953     Sugar cane            0                   0          13        5          kg         

  1212995310   Sugar cane, seed,     0                   0          13        5          kg         AB
               fresh                                                                                

  1212995390   Other sugar cane,     0                   0          13        5          kg         AB
               seed                                                                                 

  12129959     Other (sugar)         0                   0          13        5          kg         AB

  07141010     Fresh (cassava)       10                  30         13        5          kg         AB

  07141020     Dried (cassava)       5                   30         13        5          kg         AB

  07141030     Chilled or frozen     10                  80         13        5          kg         AB
               (cassava)                                                                            
  ------------ --------------------- ---------- -------- ---------- --------- ---------- ---------- ---------

# 

Note: See Appendix IV for Harmonized Tariff Schedule Abbreviations and
Codes

*Source: 2006 Customs Import and Export Tariff of the People's Republic
of China*

# Appendix III: List of Harmonized Tariff Schedule Abbreviations and Codes

**HS#**: the Harmonized Tariff System code number

**MFN%**: the percent ad valorem tariff China levies on imports
originating from countries that have Most Favored Nation status with
China

**CP%**: the percent ad valorem tariff China levies on imports
originating from Pakistan

**Drawback%**: Export Drawback Rate

**Unit**: the official unit of measure applied by Chinese Customs

**S&C**: Supervision Conditions, respective codes represent the licenses
or other documents that should be submitted to Customs at the time of
import or export.

  -------- --------------------------------------------------------------
  Code     Name of License or Instrument of Ratification

  4        Export license

  7        Automatic import license

  A        Certificate of inspection for goods inward

  B        Certificate of inspection for goods outward

  G        Import and export license for chemicals

  t        Certificate of customs quota

  x        Export license (processing table)

  y        Export license (small trade volume)
  -------- --------------------------------------------------------------

# 

Unofficial translations of the NDRC's most recent publication on
biofuels (its 2004 Law Concerning Testing for the Extensive Use of
Ethanol Blended Gasoline for Automobiles and the Regulations Concerning
the Conduct of Testing for the Extensive Use of Ethanol Blended Gasoline
for Automobiles, and the 2006 Interim Procedures for the Management of
the Special Development Fund for Renewable Energy Resources) are
available at [http://www.usdachina.org](http://www.usdachina.org/).
These circulars recount with greater detail the pilot programs and
special development that this report recaps.