In a bid to clamp down on overcapacity in the automotive industry, China’s government will require car companies to prove consumer demand warrants further investment before approvals are given, the China Daily reported, according to Dow Jones.

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The new rules, according to the newspaper’s report citing unnamed sources at the National Development and Reform Commission, will require automakers’ national sales to exceed four-fifths of productive capacity if they want to build additional plants.


Dow Jones noted that car makers, including domestic producers and Chinese-foreign joint ventures, have tabled plans that would boost total vehicle output to 16m units annually by 2011, up from 8m units currently. Last year, sales of domestically produced vehicles totalled 5.76m units, an increase of 13.5% from a year earlier.


The news agency said officials are increasingly concerned overcapacity is undermining profit margins and could lead to mass bankruptcies among weaker producers. Industry-wide profits last year dropped by 24% to 52.6 billion yuan ($6.1 billion), according to NDRC statistics.


Dow Jones said the new measures would supplement an industrial policy introduced last June which set a minimum threshold of investment in new car plants at 2bn yuan. Of the total investment figure, at least 500m yuan must be allocated to research and product development.

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The government will also require automakers to invest and promote in the development of local brands but didn’t specify when the new measures will take effect, the China Daily report said, according to the report.