The State Development Planning Commission said Monday it had relaxed pricing controls on domestic cars and allowed manufacturers full latitude within the system.
The pricing relaxation came 10 months after the commission announced it did not oppose flexible price stratagems for domestic carmakers.
Jia Xinguang, an analyst for the China National Automobile Consulting and Development Corp, said the relaxation was a bold step towards promoting domestic market competition and car sales.
Before this new relaxation, Chinese car manufacturers were only permitted to adjust prices by 10 percent based on benchmark levels set by the commission. This restriction resulted in inflated prices and a sluggish car market. Car sales in China lingered between 600,000 to 700,000 units in recent years.
The commission's announcement comes as the market is moving from government purchases to private consumers. This shift has been coupled with increased competition between carmakers.
"The government's withdrawal from pricing is a wise decision in a market-driven economy and manufacturers should be given the right to price their products according to market conditions," said Jia.
He said increased market competition, due to the pricing relaxation, was also expected to speed the shake-up of the car manufacturing sector, one of the challenges to China's imminent entry into the World Trade Organization.
Domestic car prices will scale down after the country joins the world trade body because Chinese tariffs on auto imports will decrease from 70-80 percent to 25 percent by mid-2006.
In fact, the government had given tacit consent to domestic carmakers' dozens of price cuts over the past two years.
Carmakers hailed the relaxation as encouraging news for them.
Zhou Yongjiang, vice-president of the FAW (First Automotive Works)-Volkswagen, said the relaxation would give carmakers more room to manoeuvre in the market.
"We will tune our product prices to the market in order to increase our sales," Zhou said.
FAW Volkswagen, a 50-50 joint venture based in Changchun, sold 32,000 Jetta and Audi A6 cars during the first four months this year, an increase of 27 percent from the same period in 2000.
The company cut the Jetta's price several times last year in the face of steep market competition, while Audi A6's price remained unchanged because it is in short supply.
The relaxation will also benefit consumers.
Beijing resident Jiang Heping, who has decided to buy a car early next year, said yesterday that he hoped that the prices would come down even more by the time he made his purchase.