IFC, the private lending arm of the World Bank, will loan US$135 million to the project and buy a US$10 million stake in it, Langfang, Hebei Province-based Xinao said in a statement posted on its Website yesterday.

The loan could be increased if needed, the statement said.

The project, situated in Ordos in the Inner Mongolia Autonomous Region, will be capable of producing 400,000 tons of dimethyl ether a year, or enough fuel for 2 million households, when it is completed in 2008 or 2009.

Dimethyl ether is an environmentally friendly fuel that can be used as a diesel replacement for transport as well for household cooking. It is produced by turning coal into gas to produce methanol, which is then turned into dimethyl ether.

The National Development and Reform Commission, China's top planning body, said earlier it will promote use of the alternative fuel.

"The foreign capital injection underscores their confidence in China's resolution to promote the development of the dimethyl ether sector," said Wang Jing, an Orient Securities Co analyst.

In March, US investment group Rockefeller bought a 31 percent stake in China's Shandong Jiutai Chemical Co, another major domestic player participating in the dimethyl ether market, for US$100 million.

(For more biz stories, please visit Industry Updates)