Authorities will require Chinese auto makers to merge with a domestic rival before being allowed to build new factories as Beijing moves to muscle in on the global market, state media reported Friday.

Government guidelines expected to be formally announced in March will provide tax incentives and preferential lending for the mergers, the Shanghai Securities News reported, citing unnamed sources.

The move is part of a Beijing plan to consolidate the sector and build companies that can compete on the world stage.

Two Chinese auto makers vying to become global players were presently seeking a go-ahead to produce cars in Beijing, the report said, citing unnamed sources close to management at Beijing Automotive Industry Holding Co (BAIC).

BAIC has agreed to buy some of the intellectual property rights from General Motors' Swedish unit Saab, while Geely Zhejiang Holdings, which is also eyeing a Beijing plant, is acquiring Ford's Swedish brand Volvo.

By 2011 Beijing aims to cut to 10 from 14 the number of major domestic auto makers, who are responsible for 90 percent of China's sales and output, according to an industry restructuring plan unveiled by the cabinet last year.

Under the plan, two or three companies would be capable of each producing more than two million units a year, while four or five others would have annual output capacity of one million units.

China has more than 100 auto makers, but many small players are losing money and are propped up by regional governments, according to analysts.

China overtook the United States as the world's largest auto market last year, with sales up 46.2 percent on year to 13.65 million units, partly due to policies including tax cuts and state subsidies, government data show.

SAIC Motor Corp, China's biggest auto maker in terms of sales, sold more than 2.7 million vehicles last year, but foreign brands dominate the market and SAIC's success rests on its partnerships with General Motors and Volkswagen.

earlier related report
China welcomes Ford, Toyota safety moves
Beijing (AFP) Jan 29, 2010 - China on Friday welcomed moves by Japanese auto giant Toyota and Ford of the United States to recall or suspend production of some cars due to safety risks.

China's product safety watchdog said Thursday Toyota would call back more than 75,000 cars in the country due to an accelerator problem, extending a programme that has already affected millions of vehicles in the United States.

Ford on the same day announced that it has halted production of a commercial vehicle built in China as a precautionary measure since it used a pedal made by the same firm that supplied Toyota.

"It is a good thing. The moves are responsible," said Chang Xiaocun, head of the commerce ministry's market network development department.

"I hope every auto maker would recall when problems occur. It is part of after-sales service," he said on the sidelines of a news conference.

China itself has been criticised worldwide for a raft of product safety scandals in recent years involving dangerous foods, toys and other products, with its manufacturing industry being blamed as poorly regulated and corrupted.

Toyota last week recalled 2.3 million cars and trucks in the United States because of problems with sticking accelerator pedals. It has said the action would be extended to Europe.

The company said that in rare cases, the pedal mechanism could become worn and harder to depress or stuck in a partially depressed position.

Another 5.3 million of its cars and trucks have also been affected by faulty floor mats that can trap accelerator pedals -- equivalent to more than two thirds of Toyota's worldwide sales last year of 7.81 million vehicles.

China overtook the United States to become the world's largest auto market last year, with sales up 46.2 percent on year to 13.65 million units, partly bolstered by policies including tax cuts and state subsidies, said Chang.

Chang said he expected domestic sales to continue to grow at a fast pace this year as the government kept in place or boosted its supportive measures.

"We are moving towards the goal of 15 million units (in sales this year)," he said. "I personally think double-digit growth is not very hard to achieve."

The central government spent more than 20 billion yuan (2.9 billion dollars) last year subsidising auto purchases and helping farmers buy home appliances, he said.