China will control the increase in vehicle manufacturing capacity and encourage mergers and reorganisations in the industry, according to report delivered by Premier Wen Jiabao at the nation's legislature.

The government will promote new energy vehicles and encourage the scrapping of old vehicles to reduce pollution, according to a separate report on Monday (5 March) by the National Development and Reform Commission, the country's top economic planner, Bloomberg News reported.

China is clamping down on overcapacity, benefiting companies with established production and sales, such as General Motors, while hurting newcomers to the market.

China from 30 January imposed new restrictions on foreign automakers setting up new local joint ventures. foreign automakers had received preferential treatment for seven years on their Chinese plants as the country sought investment from overseas but eligibility for incentives on factories approved by the government ended on that date.

Research firm LMC Automotive said last month the new rules signaled that China would be less inclined to sign off on new applications.

"The industry can't just pursue capacity increase for its own sake," Li Shufu, chairman of Zhejiang Geely Holding Group said in Beijing on Monday. "We need to improve the use of existing capacity and upgrade our technology."

Deliveries of passenger vehicles, including sport-utility vehicles and light goods vans, in the first two months of 2012 fell 3% year on year, based on the median estimate of five analysts surveyed by Bloomberg. That would be the biggest drop since 2005, when they fell 8.9%, according to the China Association of Automobile Manufacturers, which will release industry data later this month.

China's auto sales increased 2.5% last year, trailing US growth for the first time in at least 14 years. Delivery growth slowed from 32% in 2010, after Beijing withdrew a two year package of tax breaks and rebates, Bloomberg said.