Shanxi Coking Coal Group Co., Ltd, China's largest coking coal manufacturer, signed a cooperative agreement on Monday with the Henan-based Shuanghui Group, China's largest meat-processing company, to build a pig slaughtering and processing site. This marks the beginning of major diversifying efforts by the coal company into non-coal industries.

Located in Yangqu County of China's northern Shanxi Province, the site will be built in a one-year period in three phrases, including slaughtering and fresh meat production, meat product processing, pig farming and fodder production. With a total investment of close to 1 billion yuan (US$158 million), the project will annually slaughter 2 million pigs and produce 100 thousand tons of meat products to local consumers, with sales revenue reaching 3 billion to 4 billion yuan.

According to Liu Jintao, vice general manager of Shuanghui Group, the company will mainly contribute in terms of technologies and equipment, while Shanxi Coking Coal Group will provide the land, labor and part of the financing. As of this report, the shareholding ratio between the two parties has not been decided, so the new company has not been registered.

The provincial governments of Shanxi and Henan played significant roles in helping to push for the project. As a top coal production base in China, Shanxi Province has encouraged the local coal companies to diversify into non-core businesses. In 2011, coal companies in Shanxi generated 331.2 billion yuan in non-coal sales revenue, accounting for 59 percent of the industry's total revenue. This year, Shanxi will invest 55 billion yuan in non-coal activities, showing a 22 percent rise than last year.

However, the continued policies of diversifying coalmine companies by local government are revealing rifts between regional policymakers and China's central government. The branching off by coal-related SOEs into non-coal areas has caused concerns from high level officials after Wuhan Iron and Steel (Group) Corporation announced its plan to invest in pig farming in March.

"An enterprise should stay focused on its core business and fight against the risks of the business cycle through reform," said Zhang Wenkui, deputy director of the corporate research unit at the Development Research Center of the State Council.