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Norway's sovereign fund halves coal exposure

* Opposition Labour party wants fund to exit coal stocks

* Proposal has backing of a majority of parties

* Coal of little significance to fund -fund chief

* Impact on China, top coal producer, should be assessed -MP

OSLO, Jan 28 (Reuters) - Norway's $817 billion sovereign wealth fund, the world's largest, has halved its exposure to coal producers, with most of its remaining interest in the sector in Chinese companies, its chief executive said on Tuesday.

Oslo has been at diplomatic loggerheads with China since the award of its Nobel Peace Prize to human rights activist Liu Xiaobo in 2010.

Norway's parliament is studying a proposal to ban the fund from coal, which has the backing of a majority of parties, but not that of the minority government.

"Our investments in coal are limited and falling. They have been halved over the last two years," Yngve Slyngstad told a parliamentary hearing.

He did not say why the fund had cuts its exposure to coal. But the fund prioritises the management of the risk posed by climate change as part of its strategy. Coal is the energy source that produces the most carbon emissions.

By the end of last year the fund held 2.5 billion crowns ($405.57 million) in stocks in coal miners, equivalent to 0.08 percent of the fund's portfolio, the fund's chief said.

These included Shenhua, Consol Energy, Lubelski, Whitehaven Coal, Coal India , Cloud Peak Energy and Exxaro Resources .

"It is a sector of little economic significance for the fund," said Slyngstad. By comparison it invested more than ten times as much, or 32 billion crowns, in green companies, he said.

The fund is for ethical reasons banned from investing in certain sectors, such as tobacco, nuclear weapons, cluster bombs or anti-personnel landmines.

The Norwegian government itself owns and operates a coal mine on the Arctic Svalbard islands, exporting the majority of its coal to Europe.

FROZEN TIES WITH CHINA

A potential negative reaction from Beijing, which has said it was up to Oslo to improve relations, should be part of the assessment of the proposed ban, said one parliamentarian.

"The technical and practical consequences of pulling out, we have to think about," Rasmus Hansson of the Green Party told Reuters after the hearing. "But not because one is afraid of bullying Chinese leaders."

A possible ban could also be tricky for the fund as it is keen to expand its investments in China. Chinese authorities only allow the fund to invest $1.5 billion there. Slyngstad has repeatedly urged Beijing to open its domestic markets more to foreign investors.

The proposal by the opposition Labour party does not specify which coal firms could be banned, whether they would include coal miners, power generators that use coal, steelmakers, and/or firms that transport coal.

So the number of firms that may be affected can vary. If the focus was on miners that specialised in coal, 40 firms may be affected, said the head of the fund's council of ethics.

"We need to define which companies are going to be affected by this," Ola Mestad told the hearing. The independent council makes recommendations on which firms should be excluded from the fund's investments. Some 60 firms have been excluded.

If the proposal included all miners that extract coal, some 90 firms would be affected, including BHP Billiton , Vale, Glencore and Anglo American .

The fund is also invested in some 160 companies that use coal to generate power, such as French utility GdF Suez , and another 190 companies that use coal to produce steel.