China displaced the US in 2009 as the world’s largest car market, and the number of Chinese auto buyers went up in 2010. Chinese buyers purchased 13.6 million vehicles in 2009 and that number is expected to increase by about 30%, to 17 million in 2010.

General Motors Corp. (NYSE: GM) and Ford Motor Co. (NYSE: F) are looking to increase sales in 2011 as well. GM has sold about 2.3 million cars in China this year, and is expecting to sell 2.5 million in 2011. Ford sold far fewer cars in 2010, just 305,000, but that represents an increase of 32% year-over-year. Ford has declined to estimate how many vehicles it will sell in China in 2011, but does say that it expects to sell more than the 2010 total.

Toyota Motor Co. (NYSE: TM) expects to sell 1.3 million vehicles in the Asia-Pacific region in 2010, and expects to sell more in 2011 provided the economies of the US and China don’t slow down too much. Honda Motor Co. (NYSE: HMC) has set a goal of selling 730,000 units in China in 2011, up from an estimated 650,000 units this year.

The bright outlook for 2011 assumed that buying trends would follow the same trajectory as in the past several years. That could turn out to be a very wrong assumption.

For the past two years the government has offered a tax incentive for buyers of small cars. The finance ministry has announced that the incentive will expire, as planned, at the end of 2010. The tax rate will return to 10%, up from 7.5% in 2010 and 5% in 2009. Depending on how many sales were brought forward into the last part of 2010, the first half of 2011 could see a sharp decline in auto sales.

The government left in place a subsidy of about $450 for buyers of small-engine cars.

What one hand giveth, however, the other taketh away. China recently raised the price of gasoline by 4%, to a level of around $4/gallon. The government has also reduced the number of new vehicle license plates it will issue in Beijing by nearly two-thirds, from more than 700,000 this year to 240,000 in 2011. The restriction on new license plates could cut car sales in Beijing by 50%.

The country is also struggling with inadequate infrastructure and almost hopelessly congested roads. The government has encouraged people to buy cars, but has not built enough roads and other facilities to handle the explosion in numbers.

Another weight on 2011 car sales is rising interest rates that represent the government’s attempt to deal with inflation. And there’s no indication that the government is through raising rates. In fact, China’s economic policy makers may have little choice but to raise interest rates more than once in 2011.

If what is now the world’s largest market for new cars slows down in 2011 to 2010 levels, auto makers’ forecasts won’t be worth the paper they’re written on. There’s nowhere else to pick up the slack.

Paul Ausick

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