Beijing:  China may raise the consumption tax on small cars next year as a reduced rate is no longer needed to boost sales, an official at the State Information Center said.

The government may restore a 10 per cent tax rate on vehicles with engines no larger than 1.6 litres, State Information Center research director Xu Changming said in Beijing.

China halved the rate to 5 per cent in January 2009, helping the nation's auto sales surge 46 per cent to a record 13.6 million vehicles last year. It raised the tax to 7.5 per cent this year.

Last year's surge in demand wasn't sustainable in the long term and automakers were doing so well they no longer needed the tax reduction to raise sales, Xu said.

The government was also considering other subsidies that would target hybrids and electric cars, and may encourage automakers to expand lending to car buyers to increase sales, he said.

Healthy growth

"It is most healthy for automakers to have an annual sales growth rate of about 10 per cent," Xu said.

"It isn't necessary to extend the tax reduction into next year. The government raised the tax to 7.5 per cent this year to pave the way for returning the rate back to 10 percent."

Rise in sales

China's vehicle sales may rise 17 per cent this year to 16 million, and annual demand may eventually exceed 30 million, Xu said in a speech yesterday.

The government may introduce policies as early as this year to spur carmakers to set up auto-financing businesses, Xu said.

The proportion of automobiles bought on credit in China is 10 per cent, compared with 85 per cent in the U.S. and 65 per cent in India, he said.

One possible measure is allowing auto-financing companies to sell corporate bonds to raise capital, Xu said.

Even as the consumption tax may be raised, the auto- financing policies may contribute to a risk of too much growth, according to IHS Global Insight auto analyst Paul Newton in London.

Monetary policy

"Growth momentum in the Chinese vehicle market is likely to accelerate further thanks to the easing of monetary policy by the local administration and impending new regulations supporting vehicle financing," Newton said in a research note yesterday.

"There is a fear that amid all of this investment and stellar growth, the vehicle market could start to overheat."

Green subsidies

The market may total 16.5 million vehicles this year and continue its current rate of increase "in the next few years," Newton said.

China's government is expected to announce subsidies for hybrid and electric cars as early as July.

The details of the measures, which were originally scheduled to be announced in January, were still being debated, Xu said.