The tax changes are part of the government's plan to expand the usage of small-engine models for energy savings and environmental protection amid record high gasoline price.

The central government also ordered provincial and city authorities to lift highway-use restrictions on small vehicles by the end of March.

Tax breaks for owners of energy-efficient hybrids powered by gas engines and electric motors are also under consideration to boost the popularity of fuel-clean and high-tech models.

Tariff cut, but dispute accelerated

China reduced the tariffs on imported vehicles from 28 percent to 25 percent from July 1, while import tariffs on auto parts will also be lowered from the 13.8-16.4 percent range to 10 percent. The tariff adjustment is in line with China's commitments to the World Trade Organization to fully open to the outside world.

However, a trade dispute between China and United States and European Union in the automotive industry has been stepped up as the foreign alliance filed a request to set up a special WTO panel in September to review China's tariff on imported auto parts.

The 25 percent tariff is levied on imported auto parts if they compose over 60 percent of a complete model made in China. This drew complaints from the EU and US, who said it is breaking WTO rules.

China insists the rule aims to curb tax evasion by foreign car makers that are accused of shipping in auto parts and reassembling them for sale, avoiding higher tariffs.

The move came after China announced in August a postponement by two years of a plan to impose higher tariffs on some imported auto parts until July 1, 2008, to help resolve the ongoing dispute.

Mazda 3 production halt

Ford's Chinese joint venture suspended production of Mazda 3 in April, only one month after it went on sale in China. Chang'an Ford Motor Mazda Automobile Co Ltd contributed the production suspension to failing to meet the government requirements on production and distribution.

Most analysts believe a split over production, sales and profit sharing between Chang'an Ford Motors Corp and FAW Mazda caused the halt to production.

Mazda Motor Corp, Japan's fourth-biggest car maker, bought a 15 percent stake from Ford in Chang'an Ford while Ford also plans to be one of the share holders in FAW Mazda in a bid for increased cooperation to boost sales.

The production halt was the main reason for Mazda's seven percent sales decline in China this year for the first time since it entered the Chinese market five years ago.

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