General Motors outsold Volkswagen‘s main unit in China for the first time in June after the US car maker cut prices, a breakthrough analysts reportedly say may rekindle a price war in the world’s fastest-growing major car market.

According to Reuters, Volkswagen’s Shanghai venture, long preeminent among China’s 120 or so auto makers, fell to third place in June, as it was also overtaken by a tie-up between Honda and Hong Kong-listed Denway Motors.

Sales at Honda’s venture in the southern city of Guangzhou jumped 53% to 21,275 cars, up 82.1% from June 2003, the venture reportedly said on its Web site

According to Reuters, a margin-sapping price war would further pressure foreign car makers, who plan to spend some $US13 billion tripling capacity to six million cars a year by the end of the decade, and which are already feeling the heat from China’s efforts to cool its racing economy.

Analysts told the news agency that Volkswagen, which hacked prices by up to 11.7% in June to match an 11% cut by its US rival in May, would slash prices further to try to regain a decade-old perch at the top of China’s car arena.

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The country’s two largest car-making entities reportedly turned in markedly different performances for June.

The US car maker’s sales in China, expected to eclipse Germany in new car sales to become its number two market worldwide this year, rose nearly 5% to 24,040 vehicles in June from May, spokeswoman Daphne Zheng said.

Across town at Volkswagen’s Shanghai venture, sales skidded more than 11% to 20,085 cars in June from May, a company executive told Reuters, dipping below GM’s sales for the first time on a monthly basis.

But analysts have not yet counted out Volkswagen – a savvy operator after two decades in China – the report noted.

“Volkswagen is bound to cut prices again this year,” Zhang Xin of Guotai Junan Securities, told Reuters. “They are still tops… But ultimately sales are driven by pricing.

The report said the European firm’s venture in Shanghai is the larger of its two manufacturing ventures in the country – the Shanghai Daily said on Tuesday sales from the VW plant in the northern city of Changchun slumped more than 36% to 12,785 cars in June.

Including the Changchun operation, Volkswagen sold more cars than GM. But the US auto maker is closing the gap — fast. Volkswagen’s Changchun venture reportedly declined to comment.

GM’s car market share now stood at 12%, it told the news agency on Tuesday, from about 7% at the end of 2002. Volkswagen commands about 34% from a high of almost half.

“We’ve always been number two or three in the past,” Zheng told Reuters. “But without seeing the overall sales numbers for June, it’s hard to say much about market share, except that the June ranking is quite encouraging.”

Analysts reportedly said the Detroit giant pushed more cars out of Chinese showrooms in June after slashing prices on two core models by up to 11% in mid-May – the introduction last year of newer models such as the [GM-Daewoo designed] Buick Excelle helped.

“Price cuts were a reason. GM cut prices in mid-May, while Volkswagen only followed in mid-June,” Yale Zhang, an analyst at Shanghai-based CSM, told Reuters.

The news agency noted that car prices have been falling in China for years but discounts are taking on new significance as the government in Beijing tries to slow an economy that grew 9.8% in the year through the first quarter, restricting auto loans and keeping potential buyers at home.