The rush of private firms into the vehicles sector is a curse for the National Development and Reform Commission (NDRC), which is trying, with difficulty, to manage the growth of this key industry, in which sales growth, prices and profits are falling after bumper years in 2002 and 2003.

The NDRC is trying to limit the number of new entrants to the market and force many of China's 120 car firms to merge or shut down.

This year, production will reach 5.6 million units, up 12 per cent from last year. The total includes 2.6 million passenger cars, up 15 per cent, the lowest rate of increase since 2001, according to the China Auto Industry Association.

Last year, the industry earned net profits of 71.98 billion yuan, a drop of 5.95 per cent on 2003, with a rate of return of 6.6 per cent, down from 8.6 per cent in 2003, it said.

Of the 120 firms, only a dozen are private companies, most of which obtained a licence by acquiring a state company that had one. The two biggest private producers are Geely Automobile Holdings and BYD Auto, which last year manufactured more than 100,000 units, accounting for 4 per cent of the passenger car market.

At the 11th International Auto Show in Shanghai, all eyes will be on Geely, whose success inspired other private firms to follow suit.

Hong Kong-listed Geely expects to sell between 120,000 and 140,000 of its Geely and Maple models this year, including 10,000 for export, compared with a total of 80,000 last year.

Geely started production in 1998 and, since then, a dozen other private companies have announced plans to invest 11.7 billion yuan to manufacture cars, with the strong encouragement of local governments, which want the prestige, tax revenue and jobs provided by a car plant.

To staunch the flood, the NDRC in June last year published a new vehicles industry policy that banned existing manufacturers from selling their licences to firms and individuals which did not already produce cars or motor cycles. Any new project had to have total investment of at least two billion yuan, including 500 million yuan for research and development.

The policy torpedoed the plan of AUX Group, a maker of electrical meters in Ningbo, which had in October 2003 spent 40 million yuan to acquire a controlling share in an ailing state carmaker in Shenyang and announced plans to produce 200,000 passenger cars by next year with a total investment of 3.5 billion yuan.

Last year the plant sold 2,000 vehicles, 10 per cent of its planned 20,000. On March 24, the group said that it was writing off its investment because it could not obtain the necessary permits from the NDRC and would concentrate instead on producing mobile telephones.

Other private firms that have pulled out of the vehicle sector since the policy was published are Ningbo Bird, China's top maker of mobiles phones, and two big appliance makers, Amoi Electronics and Midea Group.

To persuade the mandarins in Beijing to give him the sales licence, Lifan's Mr Yin is playing the nationalist card. He argues that, 20 years after the first foreign joint venture, international brands still account for more than 80 per cent of the market. 'If a joint venture wants to change a screw, it has to get the foreigner's permission.'

The Lifan model was to buy design, technology, equipment and components from British, American, Japanese and Chinese companies but retain ownership of the brand, he said.

This year he plans to produce 5,000 of his four-door Lifan 520 saloons to sell for less than 90,000 yuan, the most crowded segment of the market. He wants to raise 2.4 billion yuan through a private placement, corporate bonds or a stock listing, to finance an ambitious expansion of his new plant in Chongqing.

Qian Xiaoyu, an analyst at United Securities in Shenzhen, is sceptical about Lifan's ambitions.

'It succeeded in motorcycles because it kept its production costs lower than those at state-owned company rivals. But making cars requires a higher level of technology and security,' he said.