AES Corp (NYSE: AES), the first U.S. power producer to enter China about two decades ago, is looking to sell all or some of its assets there, said three sources familiar with the process, hobbled by not being able to pass on higher coal costs in a state-regulated industry.

The sources said Arlington, Virginia-based AES, which has a market value of around $10.5bn, has recently hired an investment bank to kick off the process. A sale or sales could potentially be worth $300-$400m, reports Reuters.

China's sovereign wealth fund China Investment Corp CIC.UL acquired a 15 per cent stake in AES for $1.6bn in 2009.

The likely exit, or scaling down, underscores the challenging operating environment in China's power industry, where coal-fired power producers have little control over electricity prices, which are set by the state.

Chinese independent power producers such as Huaneng Power International Inc (0902.HK) (600011.SS) (HNP.N) and Datang International Power Generation Co Ltd (0991.HK) (601991.SS), which generate power but don't own grid assets, have seen a sharp dip in their business in recent years as coal prices have surged.

They are likely to turn a profit this year, helped by long-delayed power tariff increases, but the profit outlook remains murky in the absence of a tariff regime that allows power producers to pass on fuel costs to consumers.

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