"The move is expected to quickly reinforce the two companies' position in the Chinese oil product retail market before it opens to foreign companies," said Meng.

His remarks explained a recent SETC announcement that other domestic market players except Sinopec and CNPC have been banned from running new petrol stations to make the market run in an orderly manner.

China will open the market to foreign companies completely within three years following its WTO entry, expected at the end of this year.

Zhou Dadi, director of the Energy Research Institute under the State Development Planning Commission, said the move could help the two Chinese companies gain a bigger presence in the market and make them more competitive in the short term.

"As the first step towards countering foreign competition, it is necessary to put our own house in order," Zhou said last Friday in an interview with Business Weekly.

Although the government began clearing up the market in 1999, there are still 25,000 non-permitted petrol stations in China, which have controlled half of the retail market and triggered many irregularities in petrol quality, price and management.

Meng said the government's decision did not cover foreign-controlled petrol stations but the SETC would soon release specific regulations related to them.

Foreign companies such as British-owned BP appeared to positively respond to the government's decision.

At the same time, they are aggressively pursuing more petrol stations in China, putting extra pressure on Sinopec and CNPC to hold their ground.

Gary Dirks, president of BP China, said: "We are pleased with the action and it is expected to benefit the operation of our joint venture with Chinese partners."

Foreign companies have controlled about 300 petrol stations in China by branding and setting up joint ventures as the Chinese Government does not allow them to run wholly-owned stations.

BP, which currently runs 45 petrol stations in South China's Guangdong Province, established a joint venture in April with PetroChina - the overseas-listed arm of CNPC - to acquire another 100 stations in the province by the end of this year. BP owns a 49 per cent stake in the venture.

BP is also seeking to set up another joint venture with Sinopec to build 500 stations over the next three years. The British company said it hoped the joint venture would control 1,700 stations by 2007.

Royal/Dutch Shell and Exxon Mobil of the United States also plan to establish joint ventures with Sinopec to run 500 petrol stations each in East China's Jiangsu and Fujian provinces by 2003. Sinopec would hold a 51 per cent stake in all the petrol stations and the two foreign companies will control the remaining 49 per cent.

The two Chinese companies are prepared to take advantage of the government's policy to get a firmer foothold in the market.

Li Yizhong, chairman of Sinopec, said:"Foreign competitors will have to co-operate with us in an attempt to further explore the domestic market as long as we control more petrol stations."

Li said Sinopec planned to control 28,000 stations by the end of this year, 1000 more than in 2000, as part of its efforts to increase its market share to 60 per cent by 2005 from the current 35 per cent.

PetroChina said its target was a total of 20,000 petrol stations in five years. By the first half of this year, the company controlled 11,859 stations, a 21.9 per cent increase from that 12 months ago.

PetroChina also hopes to control 30 per cent of the market by 2005.

However, Zhou said the government's move was expected to create a monopoly involving Sinopec and CNPC.

"Their competitiveness based on a government-formed market monopoly is very fragile when faced with stern challenges from foreign rivals," Zhou said, adding the two companies must improve management, services and petrol quality of their stations in the long run.