Jan. 10 (Bloomberg) -- Yankuang Group, China's fourth- biggest coal producer, won initial approval from the government to build a 10.1 billion yuan ($1.3 billion) coal-to-liquid fuels project in northwestern China.

A group of technical experts sent by the National Development and Reform Commission has completed assessing the project in Yulin in Shaanxi province, Zhang Minglin, vice general manager of Yankuang, said by phone from Shandong where the company is based. The commission hasn't yet given its final permission to start building the venture, he said.

Record oil costs are spurring China to build plants that can turn some of its coal reserves, the world's third-largest, into gasoline and raw materials for making plastics. The nation's coal-to-liquids projects may require as much as 170 million metric tons of the fuel by 2020, accounting for 7 percent of total output, China Oil, Gas & Petrochemicals reported in July.

Yankuang's Hong Kong-listed unit, Yanzhou Coal Mining Co., will take a stake in the project, Zhang said, without elaborating.

The plant will produce 1 million tons of liquid fuels a year from coal by 2010, Zhang said in April.

Yankuang may spend a further 50 billion yuan to expand the venture to 5 million tons a year by 2013, according to Zhang. The company targets a final annual capacity of 10 million tons, he said.

To contact the reporter on this story: Wang Ying in Beijing at wang30@bloomberg.net

Last Updated: January 9, 2008 20:47 EST