The central government is expected to enact new tax policies on the auto sector in the near future to increase the use of domestically produced components and put the brakes on the rapidly accelerating market.

　　The policy is expected to target joint-venture automakers who build cars domestically using a large percentage of foreign-built components. If a car model uses too many foreign parts, the new policy will tax the imported components at the same rate as an imported car, or at least 38 percent.

　　Currently, the parts are only taxed 28 percent on average. That number will drop to 10 percent by 2006.

　　The State Development and Reform Commission, which is drafting the new policy, said on its Website that the proposal is meant to curb overheated investment and guide the auto industry into a "healthy development."

　　With hundreds of billions of yuan pouring into the industry over the last few years, the government is worried that a market bubble will be created, causing rampant bankruptcies and unemployment when it eventually bursts.

　　Some analysts think that could happen in 2005 when China has to lift its quota restrictions on imported cars as part of promises it made insgroupsto join the World Trade Organization.

　　The policy could also lead to a wave of mergers in the auto industry, analyst said.

　　"The policy could cause many small automakers to fail, especially since the market is currently undergoing a price war," said Yale Zhang, an analyst at Automotive Resources Asia Ltd. "The small companies may become manufacturing plants for bigger automakers in the future."

　　The ongoing price war is squeezing some small companies out of the market, analysts said. More than 40 models, including newly launched ones, have been pulled into the price war, which has seen some prices cut by tens of thousands of yuan.

　　Last year, China was home to 123 automakers, but only two of them - First Automotive Works in northeastern China's Jilin Province and Shanghai Automotive Industry Corp - had an annual output of more than 500,000 units. Eight domestic automakers had annual output over 100,000 units, while 95 automakers failed to produce 10,000 units last year.

　　It's generally believed in the industry that any company with annual sales below 1 million units can't survive.

　　"Keen competition is causing people to realize that the industry should accelerate its way toward domestic production" said Zhang.

　　Foreign automakers, who can't run wholly owned plants in China but must set up joint ventures, will be affected most by the new rules. Many of them don't like to produce cutting-edge components in China for fear their JV partners will obtain technology from them.