Economic curbs pushed June car sales in China to a third straight monthly decline and slowest annual rise in years.

Sales slipped 7.1% to 164,852 units in June from May, a senior industry source told Reuters, as Beijing restricts car financing nationwide to gently slow a racing economy.

Sales rose just 2.2% from June 2003 – the slowest pace in at least two years, he reportedly said, providing data from an industry body, the China Association of Automobile Manufacturers.

Volkswagen – outsold for the first time by rival General Motors (NYSE:GM – News) in Shanghai – reportedly admitted on Thursday it had been slow to act but was looking at how to reclaim top spot.

Analysts told Reuters that almost certainly means more price cuts that would re-kindle an industry-wide round of discounts.

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Multinationals such as Toyota are planning to spend some $US13 billion tripling capacity to six million cars a year by the end of the decade, stoking fears of a future glut.

“We didn’t react quickly enough and so GM overtook us. But we’re confident of regaining number one spot by the end of the year,” an executive at Shanghai Volkswagen told Reuters.

“We did encounter some difficulty in sales, but we’re going to do something about it. We expect to see a rebound in sales in coming months,” the executive reportedly said, without elaborating.

Reuters noted that credit curbs are taking effect. Only five to 10% of car buyers acquired cars via loans on average so far this year – compared with more than 20% in 2003, analysts reportedly said.

“The credit curbs did have huge negative impact on car sales,” Yale Zhang with auto consultancy CSM in Shanghai told the news agency.”Now we’d have to adjust our forecast of 2.6-2.8 million units to about 2.4 million units for this year.”

Analysts reportedly said growth of the market may slow to just 20% this year after doubling to two million units in 2003 – though that still surpasses the flat growth of mature markets.

In the first half, car sales were up 29% to 1.123 million sedans, the industry source told Reuters, but they are trending lower, from the 76.8% year on year rise posted in February to the 21% gain in May and June’s even smaller gain.

“Private consumption, the key growth engine in recent years, has been dampened as loans became difficult to get,” Zhang reportedly said. “July or August may even see sales drop year-on-year.”

Citing the industry source, Reuters said inventories hit 142,249 sedans by the end of June – figures for May were not available but stockpiles stood at 103,000 at the end of April.