As part of China's search for alternative energies, it will set up 98,840 acre farms in the southwest, growing plants that can be used to extract diesel fuel of up to 60,000 tonnes of diesel per annum.
The farm will eventually be able to provide 60,000 tons of diesel fuel per year, according to the State Forestry Administration, which signed the agreement with China National Petroleum Corporation, the country's largest oil and natural gas producer, to jointly develop the farm.
Director of the administration, Jia Zhibang said the cooperation is a key step for China to explore biological resources, and will help reduce the country's heavy reliance on coal and other fossil fuels.
The farm, to be planted this year, is located in the south-western provinces of Yunnan and Sichuan, Jia said, adding that the provinces of Hainan and Guizhou are two other ideal locations for growing bio-fuel plants.
Biological diesel oil is not only a solution to fuel shortages, it is both efficient and environment-friendly.
China consumed energy equivalent to 2.23 billion tonnes of coal in 2005, while the country's domestic energy output was only 2.06 billion tonnes.
The Chinese government has said it will encourage the development of renewable energies such as wind power, solar energy and biological fuels during its 11th Five-Year (2006-2010) Plan period.