* Separation options include spin off, sale or closure of

China business, WSJ reports

* Executives also discuss separate sales entity for Shanghai

exports, Journal says

* Gigafactory Shanghai has annual production capacity of

more than 950,000 vehicles

July 30 (Reuters) - Elon Musk dismissed as "fake news" a

report that executives at his electric vehicle company Tesla

have been told to prepare for a separation of its China

business ahead of a potential merger with his space exploration

firm SpaceX.

Tesla advisers have discussed possible options for a

separation, including a spin off, sale or closure, the Wall

Street Journal reported on Thursday, adding that it was unclear

how quickly Tesla could move on the China business and that the

plans could change.

"This has never even come up in a discussion ever," Musk,

the world's richest person, said on his X social media account

in response to the report. "Absurdly fake news".

A merger between Musk's Tesla and SpaceX would raise

geopolitical and regulatory hurdles, particularly in China,

because SpaceX is a major U.S. defense contractor involved in

national security and satellite programs, while Tesla operates

wholly owned manufacturing facilities in China.

Tesla and SpaceX could not be immediately reached for

comment outside regular business hours.

Investors and analysts have long speculated about the

possibility of combining Musk's EV and space firms, with the

discussion intensifying during SpaceX's record $75 billion

initial public offering process.

Musk had in recent years instructed Tesla executives to

organize the company with a "laser" between its U.S. and China

businesses, aiming to ensure that in the event of geopolitical

strife between the two countries, at least the U.S. half of

Tesla would survive, the Journal said, citing sources.

Unlike many foreign automakers, Tesla's Chinese vehicle

business is not structured as a joint venture with a local

partner.

Tesla's Gigafactory Shanghai remains its largest and most

productive plant globally, serving as its key export hub for

Europe, Canada and the Asia-Pacific region.

The facility historically accounts for more than half of

Tesla's global deliveries, with an annual production capacity of

more than 950,000 vehicles.

NATIONAL SECURITY CONCERN

Earlier this month, Musk left the door open to Tesla merging

with his other trillion-dollar-plus-valued firm SpaceX,

declining to dismiss the possibility and citing growing overlap

between the companies.

JPMorgan analysts, however, have pointed to the "practical

bottleneck" of getting regulatory approvals for both companies,

particularly in China, where national security concerns over

SpaceX's U.S. government ties could pose problems.

While Giga Shanghai acts as a vital export pipeline, China

itself is Tesla's second-largest market globally after the

United States, though it faces intense pressure from local

players such as BYD.

The Journal reported that executives have also discussed

creating a separate sales entity to handle exports from the

Shanghai plant. Tesla could create separate office systems and

bar China-based employees' direct access to other company units,

it added.

SpaceX President and Chief Operating Officer Gwynne Shotwell

has also acknowledged potential benefits, telling CNBC in June

that folding the companies together "might make Elon's life a

little easier" by streamlining management across his businesses.

Through its China entity, Tesla achieved the lowest costs to

manufacture its Model 3 and Model Y with the help of more than

400 domestic suppliers, a Tesla China executive has previously

said, adding that more than 60 of them also supply Tesla

globally.

Deliveries of China-made Model 3 and Model Y vehicles rose 24.4%

year-over-year in June, while second-quarter sales and exports

from the Shanghai factory increased 32.8%.

Tesla has said it sources locally more than 95% of the

components in the China-made Model 3 and the refreshed version

of the Model Y.