The government also wants to increase the market share of Chinese-brand passenger vehicles to 40 percent from the current 34 percent, according to officials from the China Association of Automobile Manufacturers.
The plan is included in a larger auto-industry stimulus package announced earlier. It seeks to create two to three powerhouse automakers with annual sales and production capacity of 2 million units each, and another four to five car companies, each with the ability to sell 1 million vehicles every year, according to the officials.
None of China's car companies meets the top criterion now. The one that comes closest is Shanghai Automotive Industry Corp. (SAIC), partner of General Motors and Volkswagen, which last year sold some 1.8 million vehicles.
Backed by the merger plan and other measures contained in the China stimulus package unveiled in mid-January, the government hopes domestic carmakers will sell at least 10 million vehicles this year and maintain annual sales growth of 10 percent over the next three years, the sources said.
Last year, the country's vehicle sales rose 6.7 percent to 9.38 million, the slowest pace of growth since 2000 as the global economic downturn reduced consumer purchasing power and curtailed exports.
The merger push will have the greatest effect on China's top 10 carmakers, a group that accounted for 83 percent of total sales last year and includes such state-owned firms as SAIC, FAW Group and Dongfeng Motor, as well as privately owned Geely.
Some consolidation is already under way. The Beijing Automotive Industry Group, the nation's fifth-biggest carmaker, is in discussions to take over Fujian Automotive Group in South China to expand production.
Guangzhou Auto, the Chinese partner of Toyota and Honda, is pursuing the sport-utility vehicle specialist Changfeng Automobile.
Under the larger stimulus plan, the government is setting up a $1.5-billion fund to help China's automakers develop new-energy vehicles. Beijing also is offering nearly $1 billion in subsidies to support vehicle purchases in rural areas starting on March 1. And the sales tax on vehicles with smaller engines is being cut in half, to 5 percent.
Inside Line says: Local governments' agendas could still derail the broader vision of the central government. — Vivian Jin, Correspondent
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