CHINA'S car market went through a rough patch in the last six months, prompting some calls for the government to revive the massive incentive programs that triggered the last boom in auto sales.

But many analysts argue that it's time for the government to take a back seat and stick to limited, surgical intervention, letting market forces determine the shape and size of the auto industry.

Accumulative sales of passenger cars and commercial vehicles in the first half of this year rose 2.9 percent from a year earlier, recovering from double-digit declines at the beginning of the year.

But unit sale growth is undermined by a price war that means lower margins for automakers. The chill remains in the air this summer. Six of the top 10 carmakers in China failed to achieve half their 2012 sales targets by June. Even in the premium end, where sales have held up best, dealers have had to offer discounts of up to 300,000 yuan (US$47,010) per vehicle to attract buyers.

The Chinese government implemented massive incentive programs in 2009 to spare the car industry the worst fall-out from the global financial crisis. Speculation is mounting that another big shot in the arm may be forthcoming after two subsidy programs were announced in the past two months.

On May 31, the southwestern metropolis Chongqing, a car-making center, unveiled the first local auto stimulus program. It offers car buyers a maximum subsidy of 3,000 yuan on each locally produced light vehicle with an engine displacement of 1.6 liters or less.

On June 13, the ministries of finance and commerce announced a new round in the "cash-for-clunkers" program. It provides vouchers of between 11,000 yuan and 18,000 yuan for upgrades or trade-ins of passenger vehicles in the rural areas besides city buses and heavy duty trucks.

No immediate plan

Expectations that more government subsidies may be forthcoming have held many consumers back from car purchases. That prompted Chen Jianguo, deputy director of industry coordination department at the National Development and Reform Commission, to tell the media in late June that China has no immediate plans to offer more incentives.

Analysts tend to concur. Ye Sheng, auto research director at market research firm Ipsos, said the Chongqing program is a regional policy aimed at helping local vehicle maker Chang'an Automobile and shouldn't be viewed a prelude to a nationwide incentive revival.

"Chongqing's move is indirect proof that the central government has no intention to subsidize rural consumers, otherwise the local government wouldn't bother to use its own money to do so," said independent auto analyst Zhong Shi, echoing Ye's views. Both Zhong and Ye struck a similarly cautious note when looking at the latest "cash-for-clunkers" program, saying there is not much untapped demand left after only a one-year lapse since the last program of its kind. Under the last program, China splashed out 6.4 billion yuan in subsidies to new car buyers in 2010, spurring 49.6 billion yuan in car sales.

After the program expired, its main beneficiaries - commercial vehicles - suffered a 6 percent drop in sales in 2011, the first decline in five years, according to the China Association of Automobile Manufacturers.

The rural incentive program and cash-for-clunkers together contributed to 10 percent of China's auto sales in 2010, which recorded a 32 percent surge from a year earlier. Sales growth dropped to 2.45 percent in 2011, the slowest in 13 years, after the two programs came to a halt.

Yale Zhang, managing director of Automotive Foresight, said that aggressive intervention by the government, such as the 2009 rebate on the vehicle purchase tax, are not likely to be repeated. "It's better to let the market sort itself out," Zhang said. "Incentives can disrupt the pace of auto manufacturing and forward planning."

Indeed, a stimulus program can suddenly unleash market demand that can't be met by existing production levels. Automakers crank up production, only to be left with overstock when the incentives are withdrawn.

Audit, tax and advisory firm KPMG reckoned China had 6 million units of unutilized manufacturing capacity last year. Still, foreign carmakers, including market leaders Volkswagen, General Motors, Nissan, and Kia, have been rushing to break ground on new plants in China in the last two months.

Speed bumps

"It wasn't that they haven't noticed the speed bumps down the road, but that their plans for production expansion were made a few years ago, when China's car market was going full speed ahead," Ye said.

Zeng Zhiling, research director at LMC Automotive, said China's annual auto sales doubled between 2008 and 2011, to 18 million units, and it would be "unrealistic" to think that rate could be sustained forever.

"But as the stark reality of China's economic downturn sank in, with its weak exports and tepid investments, the government once again started to count on the auto industry to boost domestic demand," said Zeng.

But encouraging car ownership as an engine of domestic spending growth has its downside.

The streets of China's cities are choked with smog and traffic. Parking has become a nightmare. Some cities, notably Beijing, have taken steps to limit the number of new car licenses.

"That's the reason why smaller engine vehicles have become the main beneficiaries of stimulus this year," said Zhong. "The government wants to bring more fuel-efficient cars to the road."

To that end, the government unveiled a 6 billion yuan special fund in May, promising subsidies of up to 3,000 yuan on the purchase of each vehicle with an engine capacity of 1.6 liters or less and fuel consumption of no more than 6.3 liters per 100 kilometers.

More than 100 car models qualify, but Zeng isn't optimistic about any spurt in sales. "A maximum 3,000 yuan subsidy won't have much of an impact on a market now dominated by fierce price wars," said Zeng. "And the implementation process is lengthy, with numerous intermediaries standing in the way of the money actually reaching the consumer."

Tax rebate

Zhang said many people don't like the smaller-engine cars because they have less legroom. To popularize their use, the government should offer something more attractive, such as a rebate on the vehicle purchase tax, which accounts for about 10 percent of the retail price of a car, he said.

"If such a policy could fully unlock potential demand for these energy-saving cars, could the government afford the loss of revenue?" Zhang asked, expressing doubts.

An anticipated rebate on the vehicle purchase tax didn't appear in the government's 2012 national plan promoting use of fuel-saving and new energy cars. The plan said only that there would be subsidies for the private purchase of green vehicles, but it gave no details.

In May, the Ministry of Finance called on 25 pilot cities to introduce preferential policies to help individual owners of green cars with parking, electricity fees and highway tolls.

"The central government directive is having a hard time finding its way down to the local level," said Ye. "There are too many interested parties involved in the fee cuts, and all of them are looking out for themselves."

The government is also encouraging the purchase of green cars in public and taxi fleets by offering subsidies. But, Zeng said, less than 20,000 green cars have been sold in the 25 cities since 2009.

Foreign carmakers, with relatively more mature green technologies, have the most to gain if massive incentives are introduced for energy-efficient cars, Zhong said. "Policies to promote domestically manufactured new energy cars may eventually backfire, leaving China's streets filled with Toyota Prius hybrids."

In the end, Ye said it's better to let the marketplace decide. "The market has its own rules for competition and self-adjustment." he said, "The auto industry is not yet in poor shape. I think the government has made the right call with moderate stimulus."