"The future development of the small car sector will mainly focus on technical upgrading and the introduction of new models through cooperation with foreign companies," said Song Jingang, deputy general manager of AVIC II.

AVIC II, which owns Hafei Automotive Co, the Changhe Automotive Co Ltd and Shaanxi Hanjiang Automobile Co, produced 43 per cent of China's small cars last year.

During the first five months of this year, the three companies produced 164,000 small cars and sold 151,000, which represents a year-on-year increase of 25.5 per cent and 13.4 per cent respectively.

Jia Xinguang, chief analyst of the China National Automotive Industry Consulting and Development Corp, said China's small car makers should try to improve product quality and services to beef up their role on the domestic market.

"China's auto manufacturers should not give up the country's huge small car market because of the price wars," he said.

The mini car has become popular among Chinese people because of its small size, cheap price and flexibility, he said.

Experience from Western countries suggests that demand for vehicles speeds up when a country's per capita gross domestic product (GDP) reaches US$1,000. China's per capita GDP is expected to reach this level in about two years.

Different from developed countries, China has a large population mainly consisting of medium to low income groups.

Therefore, demand for low-priced small vehicles will be higher than for medium-and high-priced vehicles, Jia said.

According to an official surnamed Du who works with the China Automotive Industry Association, the Chinese small vehicle industry has already generated one third of the country's total auto output.

With advanced technology introduced from abroad, China's mini- vehicles are up to international standards, Du said.

Domestically made small vehicles have already been exported to Southeast Asia and South America.

With the aim of encouraging domestic demand, China needs to map out a new automobile consumption policy, said Niu Li, a senior economist with the State Information Centre.

"Although the prices for automobiles have dropped, the fees and taxes for consumers are too much," he said.

Jia said the fees and taxes for automobile consumption in some Chinese provinces accounted for about 50 per cent of automobile prices.

"This was higher than a 15 per cent value-added tax imposed in Germany, a 10 per cent consumption tax and purchasing tax in Japan and a 6 per cent sales tax in the United States," he said.

The most serious problem was that local authorities are placing limits on the use of private and mini vehicles, he said.

(China Daily June 10, 2002)