"The worst is yet to come for the auto sector,'' Agnes Deng at Standard Life Investment Asia in Hong Kong said. "The industry is going to go through a shake-up.''

Car stocks are among China's biggest losers this year as the government seeks to cool the economy. Higher interest rates and curbs on bank loans have damped passenger-car sales and forced dealers to slash prices.

Denway in September posted slower first-half growth at its venture with Honda Motor, while sales and net income fell at Brilliance, a partner of Bayerische Motoren Werke.

Shanghai showrooms cut prices of BMW 318i sedans 10 per cent last month to 340,000 yuan (HK$319,668) and Audi A6 sedans made by Volkswagen's China venture fell 14 per cent to 300,000 yuan, dealers in the city said. The price of Ford Motor's Mondeo GLX fell 13 per cent to 199,800 yuan. Honda's Accord 2.0 was little changed at 220,000 yuan.

Demand is weakening even as overseas carmakers such as Volkswagen, Ford and General Motors expand their China plants to capture a bigger slice of the world's third-largest car market.

About 2.34 million passenger cars will be sold in China this year, JPMorgan Chase forecast last month.

China's restrictions on bank lending in May ``hurt demand for cars'' and price competition squeezed profit margins, Brilliance chairman Wu Xiaoan said on September 23 after the company reported first-half net income fell 29 per cent from a year earlier to 407.6 million yuan.

Brilliance's Hong Kong-traded shares have slumped 60 per cent this year, the biggest drop in the Hang Seng Mainland Composite Index, and Denway has fallen 32 per cent.

The index, a measure of 94 China stocks traded in Hong Kong, has risen 1.6 per cent. Carmakers account for six of its 10 worst performers.

Denway also ranks last in Hong Kong's main benchmark, the Hang Seng Index. The company missed analysts' profit forecasts on September 16 when it said first-half net income grew 37 per cent from a year earlier to HK$924 million. Slower sales at Denway's venture with Honda, Guangzhou Honda Automobile, limited the profit gain.

The venture sold 80,145 passenger cars in the first six months, an increase of 66 per cent, Denway said. By comparison, sales increased 74 per cent in the first half of 2003.

This year's slower pace of industry sales has led analysts to lower their forecasts. Sales surged 50 per cent in 2002 and 76 per cent last year.

JPMorgan Chase last month cut its estimate for 2005 sales by 23 per cent to almost 2.4 million passenger cars, representing growth of about 2 per cent from this year.

Rising fuel costs and a likely increase in car-insurance premiums may add to the drag on sales, the brokerage said in an October 22 report.

``The data are continuing to get worse,'' Geoff Lewis, head of investment services at JF Asset Management in Hong Kong, said. ``The auto industry is one that has seen demand slow very, very rapidly. There's cut-throat competition, and we've seen more stringent auto financing.'' China is facing the results of ``unplanned expansion'' by car manufacturers, he said.

General Motors and Ford have unveiled US$3 billion (HK$23.4 billion) and US$1.5 billion of proposed investments in the past year, while Volkswagen, whose China operations are the biggest among overseas makers, plans to spend US$7.2 billion. Toyota Motor is creating a US$460 million venture, its second, with Guangzhou Automobile Group. So far, though, overseas carmakers have said the sales slowdown is a short-term setback.

``We see this situation as temporary,'' General Motors chief executive Rick Wagoner said on October 14 after the company's third-quarter results showed profit from China fell 44 per cent to US$80 million. Chief financial officer John Devine said that China earnings would not rise for the ``next several quarters, perhaps a year''.

Car sales started to slow in May as the government moved to cool the economy, Ford's China spokesman, Kenneth Hsu, said. Ford had allowed for ``volatility'' in the market and the slowdown has not affected expansion plans, he said.

Volkswagen chairman Bernd Pischetsrieder said on October 29 he is not concerned by price cuts, and China's growth still looks attractive.

``When car sales don't rise the 35 per cent to 40 per cent they did last year or the forecast for this year is only 15 per cent, it might look disappointing,'' Pischetsrieder said. ``But when you look at the [United States and European] automakers growing at 2 or 3 per cent, 15 per cent growth is quite exciting.''

Even so, at least 30 per cent of China's car-production capacity was idle in July and August, according to the National Bureau of Statistics. That may force some Chinese carmakers to merge, analysts say. ``There are clearly too many small-scale manufacturers, so we expect some consolidation,'' KPMG International director Thomas Stanley told a September 22 press conference in Hong Kong.

Carmakers will also face one more challenge next year as China removes quotas on imported cars and cuts tariffs to meet pledges to the World Trade Organisation. Tariffs will drop to 30 per cent on January 1 from as much as 38 per cent and fall in stages to 25 per cent in July 2006.