China Slows Its Booming Auto Industry

SHANGHAI, Dec 26, 2006; Reuters reported that China announced measures on Tuesday to restrain the rapid expansion of its automobile industry, saying the sector could face a serious overcapacity problem if trends continued.

"Signs of overcapacity have already appeared, and could worsen," the National Development and Reform Commission, the country's top economic planner, said in a statement.

It added that improving the structure of the industry was an urgent task. China's auto market is the world's second largest, with sales jumping 25 percent from a year earlier to 6.45 million vehicles in the first 11 months of 2006.

Early this decade, the government keenly promoted growth of the auto industry as a way to stimulate the economy, but since last year it has become increasingly concerned that the breakneck pace of growth is wasteful and destabilising.

The central government has previously issued decrees to slow investment in autos and many other sectors such as steel, but has had only limited success as local officials and companies have found ways to get around the rules. It was unclear whether the commission's new measures would be effective.

Sales of vehicle makers applying for government approval to establish new plants outside their home bases must have exceeded 80 percent of their total production capacity in the previous year, the commission said.

Companies which are considering the creation of a second car plant must have sold at least 100,000 cars, it said. Minimum sales targets for sports utility vehicles, multi-purpose vehicles, trucks, vans and buses were also given.

Chinese auto makers currently have a combined annual production capacity of 8 million vehicles, with further capacity of 2.2 million under construction. Much of the capacity is being built by global giants including General Motors Corp. and Toyota Motor Corp.

Vehicle capacity is expected to hit 20 million units in 2010, far outpacing anticipated annual sales of only 9 million vehicles, a commission official warned late last year.

In its statement on Tuesday, the commission also encouraged mergers and acquisitions among Chinese auto makers and parts suppliers, and warned that it would not hesitate to shut down companies which repeatedly missed their annual sales targets.

It vowed to support the development of privately owned firms and to promote mutual trust between Chinese companies and their foreign partners. The commission also called on Chinese firms to continue their efforts to develop own-brand vehicles.