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China's new auto policy expected in H1 -paper

SHANGHAI, March 31 (Reuters) - A controversial policy directing the future of China's red-hot auto industry will be released within three months, dropping a clause favouring local players over foreign ones, state media said on Wednesday.

The government began circulating last year a draft of the policy, which stipulated at the time that Chinese auto makers must control half the market by 2010, threatening the likes of Volkswagen AG and General Motors Corp .

That had been stricken from the policy, the official China Daily cited industry sources as saying. It added that the policy was still being revised.

Industry executives have protested this clause would have gone against World Trade Organisation commitments pledging a level playing field.

China's main auto companies -- Shanghai Automotive Industry Corp, First Automotive Works and Dongfeng Motor Corp -- now make a vast majority of their cars with foreign partners.

The new policy document also drops a clause forcing foreign car makers to separate sales channels for locally made and imported models, the newspaper said.

But a requirement that foreign companies can only take half of a joint venture will stay, the China Daily said, even though, in practice, the government has been letting the likes of Honda Motor Co control plants that mainly export.

China has pledged to slash tariffs on imported vehicles to 25 percent by July 2006 from 40 to 50 percent now, and abolish all quotas by 2005.

Imported cars made up less than 10 percent of national sales of about two million units last year, but Beijing is worried this could become a flood once tariffs go down and quotas are removed.

Taxes on imported parts, about 28 percent on average now, would fall to 10 percent by 2006.