BYD unlawfully built seven factories on 112 acres of farmland it agreed to buy in Xi'an from a local economic development agency, the nation's Ministry of Land and Resources said July 15. The government said it will decide by Sept. 30 whether to punish the Warren Buffett-backed company.

China is struggling to balance its pursuit of economic growth, averaging 10.3 percent during the last decade, with its need to preserve enough farmland to feed about 1.4 billion people. The amount of land used illegally in the first six months of this year rose by 14 percent from a year earlier to 77.9 million square meters (19,254 acres), the ministry said.

"A lot of companies are watching the case closely, and it will set an example," said Zhang Xin, an auto analyst with Guotai Junan Securities Co. in Beijing. "If the government lets BYD off the hook easily, the illegal usage of land won't be effectively controlled going forward."

Paul Lin, a spokesman for Shenzhen-based BYD, would not discuss the potential implications for his company's business.

"We are waiting for the conclusion," Lin said. "Let's see the conclusion, and we'll prepare for that."

China, which consumes one-fourth of the world's grain, needs at least 297 million acres of arable land to grow enough food to feed its people, the land ministry said.

Economic and social development from 1997 to 2007 reduced farmland by 83 billion square meters to about 1.22 trillion square meters. That is about 1.4 percent above the minimum requirement for arable land, according to the ministry.

"We are facing a grim situation on enforcing laws regarding land-resources protection," Li Jianqin, head of the ministry's law enforcement and supervision division, said July 15. "The ministry will severely punish violators of land- safeguarding laws and regulations, and we should dare to tackle tough cases."

BYD built its factories even though 92 percent of the land they occupied in Shaanxi province was still zoned for agriculture, the ministry said. The province grows corn, wheat and rice, according to the China Statistical Yearbook 2009. It produced 4.84 million tons of corn and 3.92 million tons of wheat in 2008.

A day before the government announcement, BYD said it may delay an A-share listing in China to wait for "better timing" after stock markets fell. BYD planned to raise 2.85 billion yuan ($421 million) for projects including the development of lithium- and solar-powered batteries. BYD Chairman Wang Chuanfu said Aug. 23 the company hoped to list those shares later this year.

The company started expanding its production as China surpassed the United States last year to become the world's biggest auto market, and the F3 compact was the nation's top seller. BYD's existing Xi'an factory, built in 2005, can assemble 300,000 cars a year.

The carmaker planned to invest 5 billion yuan in a new factory in Xi'an with the same capacity, Wang said. Construction of the factories started earlier this year and was expected to be finished by the second half of 2011, Lin said. The current delays won't immediately affect production, Wang said.

"As it takes some time for a factory to be built, the Xi'an production increase would have only come in 2011, 2012 and will only affect our capacity then," Wang said.

Buffett's Berkshire Hathaway Inc., based in Omaha, Neb., owns 10 percent of BYD, which plans to sell electric vehicles in the United States this year. The billionaire investor didn't respond to a request for comment e-mailed to his assistant, Carrie Kizer.

BYD's net income for the fiscal first half more than doubled to 2.42 billion yuan from 1.18 billion yuan a year earlier, the company said Aug. 22. Sales rose 50 percent to 24.2 billion yuan.

Companies seeking to expand operations sometimes start construction before securing government approvals, and that may be what happened with BYD, said Johnny Wong, a Hong Kong-based auto analyst at Yuanta Securities HK Co.

Businesses may believe they cannot wait for those approvals, which may take years, if they want the capacity to meet peaking demand, said Yu Bing, an auto analyst with Pingan Securities Co. in Shanghai.

"The illegal usage of land has been quite common," said Wang Liusheng, an auto analyst with China Merchant Securities in Shenzhen. "Companies, especially those developing on a fast track, were forced to do so in order to catch market opportunities."

The land ministry pursued five cases this year in which domestic companies illegally built golf courses and housing developments, and dug mines. The ministry ordered unapproved buildings torn down, and courts sentenced company officials to up to four years in prison.

Local government officials deemed complicit received administrative punishments, the ministry said in July.

The Chinese Communist Party evaluates local officials using benchmarks that include economic growth, residents' income and education, and environmental protection, according to the assessment system distributed by the Central Organization Department.

High marks are needed for career promotion, prompting many officials to pursue economic growth over land protection, said Dang Guoying, a researcher at the Rural Development Institute of the Chinese Academy of Social Sciences in Beijing. China's economy expanded by 10.3 percent in the second quarter.

"If the government really means to play tough, they will order BYD to tear down whatever they have built on the land," Zhang said. "All the other companies will really draw lessons from BYD's case and won't dare to use land illegally."