This week, Hong Kong oil storage terminal operators were reporting dwindling free-on-board (fob) diesel sales, in contrast to the December and early January period.

"There is a big problem for us, because the cargoes we have bought for late January and February delivery may now face some tank or ullage problems," one trader based in Hong Kong said.

"Right now it's still okay but from next week, we may have nowhere to put cargoes." Five terminal operators in Hong Kong, subsidiaries of Royal/Dutch Shell Group, Mobil Corp, Caltex, Exxon Corp and independent China Resources Petroleum Co (CRC) act as springboard for oil exports into China.

Sources close to CRC, the largest operator, said it had bought nearly 500,000 tonnes of diesel in multiple cargoes for its 70,000 tonnes storage terminal for January delivery.

CRC hadexpected a higher sales turnover ahead of the Lunar New Year in mid February. But its diesel sales were down to just 2,000 tonnes per day on some days this week, compared with around 15,000 tonnes in early January, sources said.

Traders in Hong Kong said the sudden fall in sales was due to China's move to reinforce an import ban introduced in September.

A Chinese official told Reuters last week that diesel import quotas were unlikely to be issued for the first quarter of 1999, with domestic refiners ordered to raise crude runs.

"Now, not only will the China side check strictly for petroleum smuggling, but Hong Kong will too," one Hong Kong based trader said. "It is difficult to sell diesel now."

The Beijing government set up a 6,000 strong anti-smuggling police force on January 5, as part of its battle against rampant smuggling.

A top anti-smuggling Chinese official was also detained this month on suspicion of corruption.

In co-operation, the Hong Kong marine police last week launched a highprofile operation to arrest the growing smuggling problem.

"This has killed smuggling interest again for the time being, even if we lower our prices," one trader with an oil major said. Vessels of all kinds -- from fishing boats, bunker barges, sampans and junks to small container barges -- have been found converted with extra storage tanks to ferry oil between Hong Kong and the mainland, the police said.

Offers of Hong Kong Kong fob diesel prices have held at around $130.00 per tonne despite rising benchmark Singapore values, traders said.

The on-and-off Hong Kong to China diesel trade has been driven by the wide gap between China domestic gas oil prices and international prices, which still stands at more than $70.00 per tonne.

Traders estimate that at least 300,000 tonnes of diesel per month is moved into China illegally. China's official imports of diesel were at a five-year low in November at 25,918 tonnes, down 92.6 per cent year-on-year, according to customs data.