The central government has been facing a dilemma. As much as it wants to drive home the small-car policy that will ease its chronic energy shortage, pollution and road congestion, it cannot ignore the interests of mainland and foreign carmakers which favour producing bigger vehicles that deliver higher margins.

The government is also under pressure to provide consumption benefits to buyers of small cars to ride on the mainland's rapidly surging growth in vehicle sales, which last year totalled 8.8 million units, up 22.2 per cent from 2006.

Official estimates have put this year's sales reaching 10 million units, nearing the world's biggest car market - the United States.

The National Development and Reform Commission is mulling plans to cut the 3 per cent consumption tax for small cars as well as the toll road fees they pay.

Mr Zhang also warned of the time needed for the central government to settle different government parties' interests. 'For instance, the Ministry of Communications relies on toll road fees to finance maintenance. The [cut back] will stop a certain amount of revenue flowing in.'

Beijing adjusted the consumption tax rates for different-sized engines in April 2006. The rate for 1.5-litre engines or below is 3 per cent, while that for 1.6-litre to 2.5-litre engines range from 5 per cent to 9 per cent.

However, the slight difference in tariffs is not enough to sway consumers into buying small cars.

Instead, many industry experts believed an implementation of a long-debated fuel tax - on the table since 1994 - would be the most effective way to push small-car buying, and the central government should not pass that over, Mr Zhang said.

Until now, relative high international oil prices was one reason for the tax's delay.

Chen Qingtai, research fellow at the State Council's Development Research Centre, said in November last year that until international prices retreated, the mainland would delay introduction of the tax.

Mr Zhang said it would be unrealistic to 'wait' for lower international oil prices as they were likely to remain high. 'Implementing the policies as soon as possible is what the government has to do. And the government knows that.'

The small-car policy is part of the country's green programme that has become more pressing in the face of environmental degradation due to decades of industrialisation.

With an overhanging perception of an unclear official policy to push green vehicles, the NDRC has been compelled to negotiate aggressively with different vested interests to promote small cars to ensure a 'soft landing' in policies.

Nonetheless, domestic carmakers such as SAIC Motor Corp, Guangzhou Automotive Industry Corp, BYD Auto and Changan Automobile have announced plans to introduce hybrids in the market, while global players such as Volkswagen, General Motors Corp, Toyota Motor Corp, Honda Motor and Nissan Motor also have plans to sell green cars on the mainland.

The government's current predicament dates back two decades to the push 'to let a portion of the people become wealthy', and global carmakers were encouraged to bring in cars with medium-sized engines that were affordable to the more affluent.

This contrasted with mature markets around the world where small cars are welcomed by families in countries such as the US and Japan, because they take up less parking space and the affordable prices make them popular. 'Buying big cars is just the consumption pattern in China because that represents a higher social status,' said John Bonnell, director of market intelligence from JD Power and Associates.

Even in the long run, Mr Bonnell does not expect the market share of small cars on the mainland to grow sharply. But sales of 1.5-litre engine or above subcompact cars from Toyota and Honda would rise.

Figures from the China Association of Automobile Manufacturers showed that 748,000 vehicles with one-litre engines were sold last year, down 17.19 per cent from 2006.

Analysts said gains earned from the stock market rally last year was one important factor for consumers choosing more expensive and bigger cars.

However, Mr Bonnell emphasised higher fuel prices would be a critical and direct factor in enhancing the popularity of small cars.

Given the lower status factor coupled with a vague green vehicle initiative and little benefit to small car purchases, manufacturers have turned to the export market.

Hangzhou-based Geely Holding Group became the first mainland small carmaker to take part in the Detroit car show in 2006 as companies believed that joining global events would provide them with more international exposure and, in turn, reverse their less impressive brand reputation at home.

Although small carmakers' more than 50 per cent export growth in the past two years has been eye-catching, they failed to mask the challenges and consumer scepticism for Chinese-produced small cars. Geely Automobile Holding, the Hong Kong-listed unit of Geely Holding Group, sold 181,524 vehicles last year, a number that was 4.5 per cent short of its original target. Chery sold 381,000 vehicles last year, 3 per cent behind its previous target, while Tianjin FAW Xiali saw earnings in the first nine months of last year plunging 115.35 per cent to 17 million yuan due to steep discounting.

The negative international response to Geely's cars at the 2006 Detroit show has awoken Geely chairman Li Shufu to the fact that exporting vehicles to mature markets was not the key to boosting brand reputation.

He conceded eventually that the market demand, domestic or foreign, was for high technology small cars.

'Too many consumers regarded small economy cars as cheap and therefore undesirable, and this perception had viciously forced carmakers to compete largely on prices and discouraged them from further investment.'

Mr Li suggested that the government should provide a more favourable investment environment such as tax incentives for carmakers producing high-quality economy cars.

Chrysler China's chairman Phil Murtaugh agrees.

He said in October last year that Chrysler's partnership for the US export market with Wuhu-based QQ small subcompact maker Chery Automobile has come to a temporary halt until the quality issues are resolved.

Industry players believe that the mainland has a cost-competitive edge, such as labour and raw materials, to produce and design small cars but must ensure that quality standards match those of mature markets.

'Research and development work will be critical in determining market positions of Chinese small carmakers, especially when the country's got too many car players ... leading to an intensive competition,' said Andrew Thomson, a member of KPMG's vehicle steering group.

'Improvement of [car parts suppliers] is necessary and more sophisticated [car] parts will come up in China,' he added.

Global industry players said Chinese-made cars would be able to make inroads into the US in five years, when mainland vehicle sales could reach 20 million units.

Before small cars could enjoy any strong domestic or foreign sales, 'a well-designed hi-tech small car is the key', Mr Bonnell said.