According to the Ministry of Industry and Information Technology, China's auto industry authority, the sector's achievements in 2009, marked by growth of over 40 percent with total production and sales both exceeding 13.6 million units, are basically stimulated by the government's three policies launched in early 2009. First, the purchase tax was cut by half (from 10 percent to 5 percent) for cars with 1.6 liters or less engine capacity. This resulted in an increase of sales by more than 2 million cars. Second, stimulus measures to promote vehicles for the rural market have helped bring about an increase of 1 million units in minivan sales. Third, the government has allocated 5 billion yuan ($732.07 million) in subsidies for trade-in vehicle purchases, which led to the elimination of 1 million old cars nationwide.

It is apparent that the government's stimulus package for the auto industry has had a positive effect. It not only helped China to surpass the United States to become the world's biggest auto market, but more importantly has helped change the structure of the domestic auto industry. 

First, consumption structure has changed. While the market share of high-end and luxury cars shrank from a year earlier, that of lower-end vehicles increased from 67.2 percent to 71 percent.

Second, lower-end domestic-brand vehicles saw their market share rise from 28.6 percent to 30.7 percent, overtaking their Japanese competitors for the first time and becoming the biggest winners in 2009. On the contrary, due to its inadequate distribution of cars with engines of 1.6 liters or less in the Chinese market, Toyota's market share dropped 2.01 percentage points from the previous year and the company turned out to be the biggest loser for the year. 

Under the effect of the stimulus package, China's auto production capacity is growing by 2 million units annually, which raises the possibility of overtaking the total of the United States and Japan combined. Automakers, including Honda, Volkswagen, BMW and Hyundai, are planning to build new plants in China. 

All these factors lead many to the question: is China's auto industry overheating?

China's auto production capacity increased 330 percent, from 4.23 million units in 1998 to 18 million in 2009. And based on the expansion plans released by Chinese automakers, that capacity is expected to increase to 22 million in 2010 and to 30 million by 2015.

In fact, the warning of overheating has come from relevant government authorities, which have been emphasizing the need to guard against overcapacity. They encourage domestic automakers to solve their problems by means of acquisitions and mergers, instead of building new plants. Currently, the domestic auto industry is still highly fragmented, with more than 100 manufacturers, both big and small.

However, automakers would not share this view. Their arguments are based on the rise of capacity utilization. In 2009, the average capacity utilization rate of the domestic auto industry reached 77 percent, 18 percentage points higher than in 2008 and the highest level over the past decade. The most representative statement was made by Xu Liuping, Chairman of Changan Automobile. He estimates that China's auto market will see "rapid growth for 20 years and stable growth for 50 years," with production and sales likely to reach 50 million in 2020, which is astonishing enough. From this perspective, China's auto industry is not yet overheating. On the contrary, its current capacity arrangement might be far behind the due level for 2020. 

Many people also worry that the 2009 stimulus package will overdraw the purchasing power in the car market in the next few years. But the fact is that the sales growth in 2009 was due to rigid demand in the rural and rural-urban fringe areas, where the population accounts for more than 900 million. Wang Chuanfu, President of Chinese automaker BYD Auto, said such demand is big enough to sustain an annual 20-percent growth in China's auto market in the next three to five years.

Also, at the macro level, the auto industry accounted for 2.1 percent in China's GDP in 2009, up from 0.97 percent 10 years ago, and became the third largest contributor to the year's 12 trillion yuan ($1.76 trillion) total retail sales, with its sales surpassing 1 trillion yuan ($146.42 billion). For the Chinese Government, which is eager to boost domestic demand, this is of great significance. As a result, in the foreseeable future, the government will probably make minor adjustments to the stimulus package, but will not remove all measures. 

The author is an auto industry analyst and a senior journalist working for CEOCIO magazine