Volkswagen has cut car prices in China by up to 11.7% from Thursday, matching General Motors and heating up their intense rivalry in a decelerating market.

Reuters said car prices have been falling in China for years, but cuts are taking on new significance this year as the Beijing government applies the brakes to slow a racing economy and restricts vehicle loans, keeping potential buyers at home.

Car sales in China skidded 19.4% in May from April, the second straight monthly decline and analysts reportedly say car sales may grow just 20% in 2004 after nearly doubling to more than two million units in 2003.

Reuters noted that plans unveiled by car firms to invest some $US13 billion to triple annual capacity to about six million units by the end of the decade have added to fears of a glut and vicious price war.

GM and Volkswagen are fighting for market share, analysts told the news agency.

“If Volkswagen wants to maintain its commanding position, it has to follow GM’s lead,” auto analyst Zhao Lei at Orient Securities told Reuters, adding: “It’s also a move to cut inventories in light of the slowing car market.”

The news agency noted that, last month GM lowered prices on two core models in China by up to 11% ahead of a major reduction in import barriers next year.

Reuters said Shanghai Volkswagen, the German company’s venture with Shanghai Automotive Industry Corp [which yesterday announced a new tie-up with Britain’s MG Rover], trimmed prices on 30 models such as the Santana and Polo – the heaviest cut of 11.7% was for the Gol, which now sells for 75,300 yuan ($US9,098).

FAW-Volkswagen, a partnership with First Automotive Works, reportedly cut prices by as much as 10.9% on 14 models, taking a Jetta down to just under 100,000 yuan.

Some analysts told Reuters Volkswagen may also be trying to clear unsold vehicles – inventories have been building over past months in China, the European car maker’s largest market outside of Germany, partly due to falling sales in April and May.

The news agency noted that both GM and Volkswagen, which between them are planning to double capacity to some three million units by 2008, say they are unworried by the decelerating pace of sales though they add China’s growth would still outpace mature markets like the United States.

Volkswagen’s Passats now cost upwards of 204,500 yuan compared with GM’s comparable Buick Regal, which starts at 206,800 yuan, Reuters said.

The news agency said price cuts have already begun to bite, with first quarter earnings sliding 76% at Tianjin FAW Automobile Ltd, the Chinese partner of Toyota Motor.

Analysts reportedly say large, established car makers are unlikely to be too badly affected by sliding prices initially, due to their strong brands, but they warn that lower-end producers like Geely Automobile Holdings could be hit hard.