James Brown, in a regional energy briefing for June, said Merrill forecast that demand growth in Asia would grow in 1998 by 280,000 barrels per day (bpd) compared to a previous expectation for 350,000 bpd growth.

He said the downgrade followed reduced expectations for general economic growth in the region.

The forecast defines Asia as Pakistan to Japan down to Australasia and all the countries in between. It excludes central Asia.

Longer term, Merrill forecast Asian oil demand in 1999 at 3.1 per cent, or 565,000 bpd and 2000 at 3.0 per cent or 570,000 bpd.

Critically, Brown said Asian oil demand growth is highly leveraged on China.He said Merrill Lynch forecast that China's oil demand would grow 251,000 bpd in 1998, representing most of the net growth forecast for the whole region.

In another estimate,China's oil demand growth in 1998 is expected to slow by 0.1 per cent to 7.7 per cent from 10.1 per cent in 1997, according to International Energy Agency.

"Major uncertainties surround the projection of Chinese demand, given concerns that the recently-announced internal investment programme may be insufficient to offset the impact on oil consumption of the reduction (of) exports due to the recent loss of export competitiveness," the IEA said in its monthly Oil Market Report.

It slightly adjusted upwards Chinese oil demand for March,estimating first quarter demand growth for 1998 to have increased by an assumed 6.5 per cent."The wide variation in demand growth recorded in the first quarter is believed to misrepresent annual trends in actual Chinese demand, in the same way that sharp consumption increases in the latter part of 1997 was at odds with plausible levels of underlying consumption," the IEA said.

Chinese oil imports continued to rise, exceeding one million barrels per day in March as a resultof lower-priced imported crude and products flooding the market.

High product import levels in March, coinciding with a wave of smuggling mainly through Hong Kong, caused internal product prices to collapse and reduced refinery throughputs.

The IEA said net imports in February were revised upwards by 410,000 bpd to 0.91 million bpd after new data contrasted with a previous assumption that imports had declined due to high stocks.

The "notably higher" increase in net imports in February and March was also due to industry changes whereby China National Petrochemical Corporation (Sinopec) was able to buy foreign crude at its discretion and was no longer obliged to buy China National Petroleum Corporation's (CNPC) crude.

Small storage capacity at CNPC reportedly forced the company to cut back its production, it added.However, the weaker yen is likely to sap energy from the oil industry of Japan, China's Asian neighbour, already suffering from two years of punishing competition in the gasoline retailmarket, analysts say.

Ahead of a meeting of Group of Seven (G7) deputy finance ministers in Paris, worries about the state of the Japanese economy on Tuesday boosted the dollar above 141 yen for the first time in seven years.

"I think you can look at the weaker yen as a direct negative factor (for the oil industry)," said Daiwa Institute of Research analyst Toshinori Ito.A lower yen against the US dollar increases the purchasing cost to Japanese oil refineries that buy their crude oil in the US currency.

Ito said a higher purchasing cost would further erode margins at the retail level, already paper-thin.

Gasoline prices at filling stations have tumbled since April 1996, when a ban was lifted that had virtually limited oil product imports to oil refiners.

A second analyst, who declined to be named, said it was unclear whether oil companies or filling stations would shoulder the burden of increased oil costs.