China may encourage Shanghai Automotive Industry Corp. (Group) and China FAW Group Corp., its two biggest automakers, to buy rivals in a bid to revive the car industry, according to two people familiar with the plan.

 

Dongfeng Motor Corp. and Changan Automobile (Group) Ltd. will also be allowed to buy companies nationwide, said the people, who have seen a draft policy document. Guangzhou Automobile Group Co., Beijing Automobile Industry Holding Co., Chery Automobile Co. and China National Heavy Duty Truck Group Co. will be able to make acquisitions within defined regions, added the people, who declined to be identified as the policy hasn’t been published yet.

 

The government plans to combine the country’s 14 biggest automakers into 10 as it tries to develop global players out of state-controlled companies now mainly reliant on being cheap assemblers for General Motors Corp., Toyota Motor Corp. and other overseas partners. Chinese automakers are also battling slumping demand and competition among 52 car brands at home, as well as safety concerns overseas that have limited export sales.

 

“The policy is more aggressive than the market’s expectations,” said Ricon Xia, an analyst at Daiwa Associate Holdings Ltd. in Shanghai. “The government chose the right time to do the right thing to nurture a few automakers that will be stronger to compete with overseas rivals.”

 

China also aims to revive nationwide auto sales growth to 10 percent this year and for the next two years, the people said. Vehicles sales rose 6.7 percent last year, the slowest pace in a decade, to 9.4 million, according to the China Association of Automobile Manufacturers. The group predicted a 5 percent rise this year in January.

 

Government Bailouts

 

China and governments worldwide are seeking to help automakers as the global recession forces consumers to pare spending on expensive items. The U.S. has distributed loans to GM and Chrysler LLC to help them cope with sales that have slumped to the lowest in almost three decades.

 

Car sales in China have fallen in five of the past six months. Still, the abolition of some road taxes and other measures have helped temper the demand drop, enabling China to surpass the U.S. as the world’s biggest auto market last month.

 

China wants to build up two or three automakers with annual sales of more than 2 million vehicles by 2011, the people said. It also wants another four or five with sales above 1 million by the same point, they added.

 

SAIC Motor Corp., Shanghai Auto’s listed unit, sold 1.72 million vehicles last year. Most of its sales come from ventures with GM and Volkswagen AG. Dongfeng Motor Group Co., controlled by Dongfeng Motor Corp., builds cars with Nissan Motor Co. and Honda Motor Co.

 

China aims to boost domestic brands’ share of local car sales to more than 30 percent this year, the people said. Local brands’ share slipped 0.4 percentage points last year to 25.9 percent, according to the automakers group.

 

China has also drawn up stimulus plans for industries including steel, oil and petrochemicals, as part of efforts to revive cooling growth. The country’s economy, the world’s third- largest, expanded 6.8 percent in the last quarter of 2008, the slowest pace in 7 years.