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China Watch: Top Brands, Low-Polluting Cars to Take Lead

Stocks in this article: FGM

TAIPEI, Taiwan ( TheStreet) -- Here are some more numbers that show China's economy going from the fast lane to the slow lane: Auto sales in the world's top vehicle market rose 9.9% year on year in June, a drop from 16% year-over-year growth in May, the China Association of Automobile Manufacturers says.

But some automakers will see sales surge in the years ahead. Who are they?

First the history: Starting in the mid-1990s, China encouraged its people to buy cars as evidence of national wealth to a then-skeptical outside world. Officials once offered purchase incentives as pundits in cities such as Beijing gloriously pronounced that cars had replaced bicycles as the primary means of transportation.

Some of those leaders backed up their encouragement by offering subsidies for automakers as well as buyers. But they didn't realize until it was too late that they should have redesigned urban roads (not just add super highways) and re-educated drivers on common anticongestion etiquette to match the increase in vehicle use.

The consumerist rite of passage showed signs of an unstoppable surge around 2002, and today angry drivers often go as far as driving on sidewalks to bypass traffic.

As a result, major Chinese cities have started saying "enough" as pollution and congestion become unmanageable. Who-can-drive-when rules and other bans have followed, slowing June auto sale growth to a total of 1.58 million units.

Drivers also threaten China's energy sources, a concern for economic planners. Of China's 8 million barrels of oil consumed per day, 40% goes to transportation, the Chicago-based International Association for Energy Economics said in a 2010 report on China's automotive industry.

The government is desperately looking around the world for new oil resources to keep supply lines open.

Says the nonprofit association's report: "The question is how much the vehicle fleet will grow before the energy constraint becomes too severe."

Slack sales growth has raised inventories to uncomfortable levels, and local governments may restrict vehicle sales to reduce traffic congestion, warns Sharon Wong, Asia equity research director with S&P Capital IQ in Hong Kong. Average inventory was more than two months as of the end of May compared to 45 days a month earlier, a China Automobile Dealers Association representative says.

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