A drastic cut in the cost of buying a new car by a leading manufacturer has started a buying frenzy and increased the likelihood of a renewed price war, China Daily reported.

The decision to slash the price of the Xiali 2000 by nearly a quarter to 97,000 yuan ($US11,757) has led to a nationwide sales surge, the paper said.

"Business is terrific. We made 50 to 60 sales a day compared with the usual 20 of the last few months," a Xiali saleswoman at Beijing's largest car trading market told China Daily.

Rivals are following suit, the paper said. Jili in East China's Jiangsu Province cut prices while Central China's Dongfeng Citroen, a Sino-French joint venture and market leader, also cut the price of its popular Citroen ZX Fukang.

It will introduce a  revised cut-price Fukang this year, China Daily added. But, the paper said, Shanghai General Motors, a GM joint business in China, and Shanghai Volkswagen, are still mulling over announcing a price cut.

"We will not take a blind jump. If we delude ourselves that China's car market will continue on a price war path and then it does not, consumers will lose confidence in the domestic car business," Xiao Guopu, a sales manager at Shanghai Volkswagen, told China Daily.

Xiao added that price cutting could continue in China but a wild round of reductions is out of the question as it is still defined by market demand.

The paper said that China's domestic car makers are bracing themselves for an influx of foreign companies following the country's entry to the World Trade Organisation last year. That has attracted more car imports as tariffs are slowly scrapped.

China Daily said that vehicle industry experts are still mixed on how far the price drop will go. Some say the Spring Festival - the most important festival in China which falls on February 12 this year - may spark another round of price cuts, the paper added.