According to a report in the government-controlled China Daily, Beijing is mulling a a mechanism that could force near-bankrupt car companies to close operations.
The country's Ministry of Industry and Information Technology issued a circular that outlined the plan, which aims to improve the domestic industry's competitiveness and speed up change in the automotive sector.
China has about 1,300 automobile and motorcycle manufacturers, according to the ministry's statistics, the China Daily said. It added that nearly a quarter of them are near bankruptcy.
Apart from China's largest carmakers, which all operate joint ventures with western car companies, most domestic automotive companies have difficulty competing with foreign groups.
According to the statement quoted by the China Daily, automobile and motorcycle manufacturers that have already declared bankruptcy or have entered bankruptcy liquidation procedures will no longer be allowed to build cars.
In addition, small car and truck makers will have two years to overhaul production or shut down.
The huge Chinese market continues to grow relatively fast, with passenger car sales up 7.1 pc in the first six months of the year to 7.61 million units, according to the country's Association of Automobile Manufacturers. In recent years, the country has posted double-digit sales growth.