The new rules will raise costs for foreign firms and encourage them to manufacture in the mainland China's central government has proposed prohibiting car dealerships that sell domestically made vehicles from carrying imported models, in a move aimed at protecting mainland producers. The government has sent a document to major domestic car producers on the proposed regulations, an industry source said, adding that it could be enacted as soon as next month. Analysts said the proposal would prevent global carmakers from selling imported cars - mainly top-end models not produced in China - through the sales outlets of their mainland joint ventures. It would also increase distribution costs for imports and encourage foreign carmakers to make more higher-end models in their China factories. Foreign firms intent on exporting to China would need to make large investments to build up their own dedicated distribution networks and after-sales service centres. Japanese and German carmakers were the largest exporters to China, analysts said. The proposed regulations stipulate that distribution outlets will only be allowed to sell either locally-made or imported cars, thereby separating sales channels into two distinct markets. In the car market, 80,000 to 90,000 units were imported last year, accounting for 7.57 per cent of total sales, analysts said. In the overall vehicle market, imports comprised less than 4 per cent of sales. 'We believe the regulations should be positive for domestic auto producers, including [multinationals'] joint ventures in China, because they can cushion the impact of the imported vehicles through raising the cost of selling imported vehicles, especially as of 2005 when China lifts the quota on imported vehicles,' JP Morgan analyst Frank Li said. Multinational carmakers would have added incentive to introduce more models to their mainland joint ventures that had already built up extensive distribution networks, he added. Under China's World Trade Organisation commitments, tariffs on car imports will fall to 25 per cent by 2006 from 38.2 per cent currently. Locally listed Denway Motors' 47.5 per cent-held joint venture with Honda Motor is expected to have 200 distribution outlets by the end of this year. Brilliance China, also listed in Hong Kong, recently launched a joint venture with BMW that plans to roll out a 60-outlet distribution network. ING head of China research Peter So said the proposed regulations would make it tougher for distributors aspiring to make a decent profit on imports as they would be limited to the smaller high-end and niche markets. Currently, firms such as Toyota and Fiat have been selling imports and locally made cars through franchised dealer outlets set up by their joint ventures in China. A Toyota spokeswoman in Beijing said the company was aware of the coming restrictions, but would not comment on the company's strategy to counter them. Toyota has a car joint venture in Tianjin with First Auto Works and is in talks with Guangzhou Automotive Group to open a second factory. The regulations will require new distribution outlets to have at least five million yuan (HK$4.68 million) in registered capital and enough personnel and facilities to handle sales of at least 200 vehicles a year. Mr So said the central government was considering additional policies to prevent over-building of car plants, particularly by small firms with small economies of scale and dubious safety standards. 'They are looking more closely at feasibility studies [of proposed plants] and things like access to foreign exchange,' he said.