Projects costing 31.6 billion yuan are already up and running, producing chemicals that originally came only from petroleum. By 2020, the investment is expected to total 260 billion yuan, surpassing Ningxia's total economic output last year.

But the ambitious plan could be hobbled by the region's limited water resources, although local officials seem oblivious to that fact.

As a testament to the region's economic ambition, Ningxia is hosting the third Sino-Arab economic and trade forum from Thursday until Saturday, where more than 500 Muslim entrepreneurs and officials from around the world will attend.

Even though the Yellow River runs through the autonomous region, Ningxia still suffers from a severe water shortage, with its per capita water availability just a tenth of the mainland average.

A recent study by Greenpeace and the Chinese Academy of Sciences shows that by 2020, Ningxia will see a water supply shortfall of 1.3 billion tonnes, or 15 per cent of the region's demand.

Both coal mining and coal-based chemical projects are highly water intensive.

Zhang Yuzhu, a deputy manager at Shenhua Ningmei Coal Chemical, said that producing one tonne of polyolefin, a plastic material used in consumer goods, requires more than 30 tonnes of fresh water.

At least 10 tonnes of water are consumed to turn one tonne of coal into liquid fuel.

"It is true that coal chemical projects are water-intensive and constrained by water resources," Zhang said. "That's why the industry has developed very slowly in other coal rich regions, such as Xinjiang ."

But he said that Ningdong (literally eastern Ningxia), where the industrial zone is located, is the perfect place because the Yellow River is only 30 kilometres away.

Every year, the company is given a water consumption quota by the Ningxia government, Zhang said. In exchange for the right to use more water, the company pays for water conservation projects in the agricultural sector, he added. "In the short term, I don't see any threats from water scarcity," Zhang said. "But in the long run, industrial projects in this area will have to compete for the limited water quota."

Besides the coal chemical projects planned by Shenhua Ningmei, Ningdong is also set to become an electricity supply base with 26 coal-fired power plants that have already been built or are planned. These, too, need vast amounts of water for cooling.

Based on the existing plans, the Greenpeace report calculated the area's water demand by 2015 and found that the available water resources "will by no means support these industries".

The Yellow River Conservancy Commission allows Ningxia to use 4 billion tonnes of water from the river each year. But between 2001 and 2005, the Greenpeace report noted, Ningxia consumed 25 per cent more than it should have due to poor management of water resources.

However, local officials seem convinced they will make do . About 96 per cent of the water consumed in Ningxia is used for agriculture, largely for traditional but wasteful flood irrigation.

That prompted the autonomous region's government to design a water rights scheme that compensates investors in industrial projects who contribute to the building of drip irrigation systems, where the timing and amount of irrigation can be precisely controlled. The amount of water saved by such programmes can then be used for industrial purposes - something hailed by local officials as an innovative solution for the region's chronic water shortage.

"By 2015, the water rights scheme will fully meet the demand for industrial water in Ningxia," said Zhang Bawu, deputy director of the autonomous region's development and reform commission.

But Sun Qingwei, a coal campaigner with Greenpeace, said the scheme is an empty promise designed to justify Ningxia's breakneck industrial expansion.

"The area under irrigation in Ningxia has been rising recent years as a result of a similarly ambitious agricultural plan," he said. "I don't see that water for agricultural use is being saved.

"The water rights scheme is more like a numbers game, and Ningxia has always been using more water from the Yellow River than it is allowed."

Though rich in coal reserves, Ningxia has never really cashed in on the coal mining industry, unlike neighbouring Inner Mongolia and Shaanxi. Its economic output ranked 29th among the mainland's 32 provinces, autonomous regions and municipalities last year.

But the country's Go West campaign saw the State Council designate Ningxia as one of the mainland's seven major coal chemical centres in 2008. Since then it has also won approval to build energy- and water-intensive projects, such as aluminium smelting, that are no longer allowed in the eastern provinces.

There is even a large plantation of fast-growing trees, which consumes a significant amount of water, and a paper mill on the edge of the Tengger Desert.

"It is the downstream provinces that will suffer from such uncurbed use of water," Sun said. "Of course Ningxia doesn't care. But at the end of the day, such a price has to be paid."

Ma Zhong, director of Renmin University's school of environment and natural resources, cautioned that the development strategy of the Go West campaign - which relies on heavy investment and the depletion of natural resources - could eventually bring disaster to the country's environmentally fragile western regions.