The Guangzhou municipal government announced on the weekend that the number of new car registrations would be capped at 120,000 for the coming year in an attempt to stem the city's worsening gridlock and air pollution. The news spells disaster for car dealers as it means that this year they will be allowed to sell only about half of the 226,000 units they sold last year.

'More small- and medium-sized car dealers could be squeezed out of business or acquired by bigger rivals in the coming months,' John Lu, a Shenzhen-based car analyst at Guosen Securities, said.

'There are 14 other mainland cities where car ownership exceeds a million. It's only a matter of time before the cap is extended to those places.'

Lu said he expected car stocks to fall when the Hong Kong stock exchange resumed trading today.

Guangzhou is the fourth city - after Beijing, Shanghai and Guiyang - where the local authorities have introduced administrative measures to control car sales.

The city government said on Sunday that the measure was necessary because the driving speed on 27 per cent of Guangzhou's major routes was an average of just 20 km/h, with new car sales growing at an annual rate of 19 per cent over the past five years. Construction of new roads and parking spaces has failed to match sales, with an average of 3.3 cars per parking bay.

According to preliminary sales figures from the China Passenger Car Association, sales of the three most popular car types - sedans, sport utility vehicles and multipurpose vehicles - rose year on year by about 10 per cent during the first three weeks of last month. But a Hong Kong car dealer with more than 20 mainland sales outlets said the outlook for the industry was bleak.

'We sold more than 1,000 cars - about half of our monthly sales - in just a few hours after the announcement of the policy. The problem that we now face is how to sustain growth in the coming months,' the owner of the chain said.