All of this is happening against a backdrop of growing concern over the effects on the environment, the dependence on imported oil and massive traffic congestion problems in key cities.

The government, worried about the growing demand for oil, introduced new consumption taxes this year to discourage the buying of luxury vehicles. Last year, it also introduced fuel efficiency standards to boost the sale of smaller vehicles.

An industry study by IBM and the University of Michigan said that 40 per cent of China's oil was imported in 2004, making the country the third-largest importer of oil.

However, the April 1 luxury tax appears to have had no effect on mainlanders. Imports, which doubled to 72,000 units in the first quarter, hit 21,000 in April, the first month the tax was in effect.

There are also growing concerns about serious pollution and traffic congestion, with 1,000 new cars taking to the streets each day in Beijing alone, leading to worsening air standards and unprecedented road congestion.

Despite government efforts to improve infrastructure before the 2008 Olympic Games, there are only 600,000 parking spaces for 2.4 million registered vehicles.

While these issues worry officials, car makers are excited about the impact of financing and the rising second-hand car market. announced last year make it easier and cheaper to transfer ownership of a car. GM, VW, Audi, BMW and Toyota have all given dealers the right to sell their used vehicles.

The IBM-Michigan report said that a well-regulated used-car market could result in strong growth for manufacturers.

'The used-car market puts more liquidity into the market,' says Tim Dunne, a partner with Automotive Resources Asia. 'People who sell their old cars get more cash and they can buy up.'

The industry is also extending its reach outside the big cities.

'In recent years, we've been seeing a very clear trend of a slower pace of growth in major cities, but fast expansion in second and third-tier cities,' said Kenneth Hsu, vice-president for public Affairs, Ford Motor (China). 'Small towns are now seeing new dealerships, and this is bringing in more sales.'

However, the rising number of foreign and local car makers could lead to serious overcapacity.

In a report in April, Morgan Stanley said that idle capacity would climb to 1.2 million this year, up from one million last year.

The fierce competition has already resulted in price slashing, with prices falling dramatically over the past two years. Volkswagen, Shanghai GM and Ford have all reduced prices, and more cuts may be coming.

Despite the problems, analysts say China has huge potential. According to Ford, there are just 27 cars per 1,000 driving population, against an international average of 120, and this figure is predicted to rise to 40 per 1,000 by 2010.

The sale of passenger cars rose 75 per cent during the first quarter to 1.2 million units, and sales are tipped to reach five million units this year, a sharp rise from 3.1 million last year, and 500,000 in 2000.

According to a Ford assessment, the car market in China will break the 10 million-unit mark between 2010 and 2012, and could overtake the US in 2020 to become the world's largest.

Still, foreign manufacturers, many of which are suffering in their home markets, are experiencing a boom in China. In the first two months of the year, sales of Ford vehicles, including imports, rose 121 per cent to 33,511 units. The industry grew 54 per cent. And the company says its Premier Automotive Group, which includes Volvo, Land Rover and Jaguar, also saw first quarter sales leap 143 per cent over the year-earlier period.

GM's sales rose 75 per cent during the period, and the company expects the market to grow more than 20 per cent this year, beating the estimated industry average of 10 per cent to 15 per cent.

GM sales last year were up 35 per cent, pushing it ahead of Volkswagen to become the biggest foreign seller, with a market share of 11.2 per cent.

Mr Dunne said low-priced, small cars accounted for 63 per cent of sales, up from 39 per cent in 2000.

Growing competition for market share also has led manufacturers to offer a wide variety of choices.

Mr Hsu said consumers were responding to the range of new products which he said were better addressing buyer needs.

Foreign manufacturers also are racing to expand their networks. GM has about 1,000 mainland dealerships, up from nine in 1998. Ford, which has 160 authorised dealers, said that it was opening a new dealer each week on average, and expected to have 200 official dealerships by the end of this year.

Local and foreign manufacturers also are expanding to meet anticipated demand. The Changan Ford Mazda partnership will complete its new assembly plant in Nanjing in 2007, giving the venture combined annual production capacity of 360,000 units.

GM said it would expand its output primarily through its existing facilities in five cities.

Toyota Motor plans to triple production to 900,000 vehicles by 2010, and Dongfeng Peugeot Citroen said it would make 300,000 units this year, up from 220,000.