CHINA said it will encourage foreign investment in vehicle manufacturing in its western region, reversing a policy to remove automaking from a list of industries qualifying for government incentives.

Starting on June 10, foreign auto investment will be given preferential treatment, the National Development and Reform Commission and Ministry of Commerce said in a joint statement yesterday, without giving more details. The policy was among measures taken to encourage labor-intensive projects in the central and western regions, which attracted US$19.2 billion in overseas investment last year, according to the statement.

The announcement follows official figures this week that showed foreign direct investment growth slowed in April, highlighting concern over outlook for the world's second-biggest economy. Giving foreign automakers preferential treatment in building plants may allow companies like Volkswagen and General Motors to accelerate expansion in China, increasing competition for local companies.

"The change in policy direction is meant to boost foreign investment and economic growth rather than for the need of the auto industry," said Zhang Xin, a Guotai Junan Securities Co analyst. "It could well cause an increase in excess capacity and make it more difficult for local automakers to compete with foreign companies."

Automakers will be encouraged to set up auto factories in Inner Mongolia, Guangxi, Guizhou, Shanxi, Gansu, Ningxia, Qinghai, Xinjiang, Yunnan and Sichuan as well as the municipality of Chongqing, according to the statement.

Foreign companies received preferential treatment for seven years on their Chinese plants until January 30, 2011, when the NDRC removed the industry from its list of favored industries for investment to clamp down on overcapacity.

Volkswagen and GM are among foreign giants expanding production in China to cater to demand in the world's largest vehicle market, estimated to exceed 20 million units this year.