Aspects of China's proposed new vehicle industry policy were criticised on Monday as "stupid and old-fashioned" by a Volkswagen executive, a news agency report said.

The new draft policy's continuation of a requirement that foreign companies maintain separate distribution outlets for imported and locally-produced cars suggests the policy is short-sighted and overly conservative, VW's Asia Pacific president Bernd Leissner told Dow Jones Newswires.

The requirement effectively doubles the distribution costs of dealers wishing to sell both imported and locally-produced VW models by requiring separate sales facilities, Dow Jones said.

"Why offer the customer in two different places import cars and nationally-built cars ... it's very short (term) thinking and to me makes no sense," Leissner said, according to the report, adding: "I would believe that it's much better for China to open its (auto) market...( so) everyone would invest here because from a cost point of view it would make absolutely no sense for somebody to bring cars from outside."

Dow Jones noted that Leissner isn't alone in expressing dissatisfaction with the draft car industry policy from China's National Development and Reform Commission - the draft was circulated in May and the government has asked companies to submit their feedback on the proposed policy.

According to the news agency, industry observers and analysts say the draft policy, designed to update a 1994 document, supports Chinese models and local companies at the expense of foreign rivals.

A policy draft seen by Dow Jones Newswires stipulates that more than 50% of sales of locally manufactured vehicles must be from domestic companies that own the technological property rights.

That clause is likely to force international car makers to increase technology transfers to their domestic joint venture partners, Dow Jones said.

But Leissner told the news agency in an interview that he was confident that the final form of the draft car industry policy will reflect the more reasonable and pragmatic outlook of younger, more progressive elements in China's government.

"I believe they know that without foreign capital and foreign investment there is no way (for China's economy) to go forward, so this (policy) will probably be redesigned over the next year," he reportedly said, adding: "It's a fight between modern thinking and older thinking ...(and) I trust the forward thinking of the new government."

Dow Jones said such hopes are directly related to the fact that VW plans to invest more than €6 billion in China to help double annual production capacity to around 1.6 million vehicles over the next five years.

VW's China joint ventures recorded a more than 40% year on year increase in sales in July and will produce a total of 680,000 vehicles in 2003, Leissner told the news agency.

VW will source the expansion funds from retained profits from its China operations and divide the investment roughly equally between its two domestic car manufacturing joint ventures, FAW-Volkswagen Automotive Co. and Shanghai Volkswagen Automotive Co., Dow Jones added.

Strong demand helped China record a 70.6% year on year rise in passenger car production to 171,000 units in July, the National Bureau of Statistics reported on Monday, Dow Jones said.

Leissner told the news agency that VW is projecting 10%-15% year-on-year sales growth over the next decade.

But aggressive expansion by competitors such as General Motors has trimmed VW's dominant market share from an estimated 45-47% in September 2002 to around 35%-40% currently, the report noted.

"We can't produce enough cars (to maintain market share) and that's why we need the (new) investment," Leissner said, according to Dow Jones.