China may encourage Shanghai Automotive Industry Corp (Group) and China FAW Group Corp, its two biggest auto makers, to buy rivals in a bid to revive the car industry, according to two people familiar with the plan.

Dongfeng Motor Corp and Chang'an Automobile (Group) Ltd will also be allowed to buy companies nationwide, said the people, who have seen a draft policy document. Four other auto makers will be able to make acquisitions within defined regions, added the people, who declined to be identified as the policy hasn't been published yet.

SAIC Motor Corp, Shanghai Auto's listed unit, has surged 66 percent this year in trading in the city on speculation the government will step up efforts to develop global players out of state-controlled auto makers now mainly reliant on being assemblers for overseas partners. Consolidation may also help Chinese car makers as they battle slumping domestic demand and competition among the country's 52 different car brands, Bloomberg News said.

"The policy is more aggressive than the market's expectations," said Ricon Xia, an analyst at Daiwa Associate Holdings Ltd. "The government chose the right time to do the right thing to nurture a few auto makers that will be stronger to compete with overseas rivals."

Dongfeng Motor Group Co jumped 4.2 percent yesterday, the most in a week, in Hong Kong to close at HK$2.98 (38 US cents). SAIC Motor climbed 0.8 percent to close at 8.9 yuan (US$1.30) in Shanghai. FAW Car Co, a unit of FAW Group, rose 3 percent to close at 10.92 yuan in Shenzhen.

The government plans to combine the country's 14 biggest auto makers into 10, the people said. Guangzhou Automobile Group Co, Beijing Automobile Industry Holding Co, Chery Automobile Co and China National Heavy Duty Truck Group Co will be able to make acquisitions within specified regions, they added.

China also aims to revive nationwide auto sales growth to 10 percent this year and for the next two years, they said. Vehicles sales rose 6.7 percent last year, the slowest pace in a decade, to 9.4 million, said the China Association of Automobile Manufacturers.

(Shanghai Daily February 26, 2009)