The government wants to promote private car ownership: Official targets say auto sales to private consumers should rise to 70% of total sales from 30% at present.

But in the long run, the price would be lower, as more producers strive to produce environmentally friendly cars

Kenneth Hsu, Ford, China

The news coincides with Volkwagen's launch of a smaller, more mass market model, the Bora, which will be made by its two China joint ventures, Shanghai VW and First Automotive Works.

The German automaker dominates the sedan market in China, with over 50% of sales. It will launch another, still more compact model - the Polo - into the Chinese market at the end of this year.

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At present Chinese car buyers pay 10% purchase tax, while the manufacturer pays a consumption tax of between 3% and 8%.

No guarantee for buyers

The State Economic and Trade Commission said it will cut consumption tax on cars that meet the European II Environment Protection Criteria.

There is no guarantee that auto-makers will pass on the benefits of the cut to consumers.

Kenneth Hsu, vice president of Ford Motor China, said the move by the State Economic and Trade Commission (SETC) is likely to lower prices eventually but the immediate impact on margins will be slight.

VW takes aim

"But in the long run, the price would be lower, as more producers strive to produce environmentally friendly cars, which would lower the market price as a whole," the Ford manager said.

Volkswagen's new Bora production line was opened by VW group chairman Ferdinand Piech, who said the launch was "a major step forward" for its China strategy.

VW plans to produce 50,000 Boras in China next year, priced between $20,500 and $27,800 each.

It has built up its strong market share through sales of Santana and Passat sedans and luxury Audi models.

The government expects the tax cut to benefit domestic manufacturers too, forecasting they could save 200m yuan (�16.7m; $24.2m) in tax each year.