China's passenger car market is slowing faster than expected, as a result of a fuel price hike, the slowing economy and the rising vehicle purchase tax. It reported the slowest annual growth rate in two years in July.

The sector has maintained a high level of growth of between 20 and 30 percent annually since 2005 and consequently China has been seen as the most important market for global auto conglomerates.

However, statistics from China Association of Automobile Manufacturers (CAAM) revealed that last month, sales of sedans, multipurpose vehicles and sport utility vehicles in China climbed 6.79 percent from a year earlier, the smallest monthly gain and the first single-digit rise in two years.

With 488,200 domestically produced passenger cars sold nationwide in July, down 17.02 percent month-on-month, China's booming auto market is suffering the fifth consecutive month of decline this year.

"More obviously, the sales growth in the sedan segment has cooled from more than 20 percent in the first quarter, 10 percent in the second quarter to the current 1.6 percent," said Zhao Xuegui, an analyst from Guosen Securities.

"It steadily slowed in the first half, but may see a vertical dive after July," Zhao said.

"There are too many adverse factors this year to dampen auto sales," said Hui Yumei, an automobile analyst from Sinotrust, a leading domestic auto research firm.

"New government tax measures and higher fuel prices were blamed for the unusual slowdown, as well as consumers delaying their purchase because of the expectation of a price cut after the Anti-Monopoly Law implemented this month and their flagging enthusiasm in an uncertain stock market," said Hui.

In late June, Beijing raised fuel prices by nearly 20 percent to cut oil use and curb pollution. It was the first rise in seven months, but not the last this year.

"The growth may ease further in the first half of next year to 2010, particularly if China's economy slows and if oil prices continue surging," said Gao Heng, an independent auto analyst based in Beijing.

The slump is far beyond analysts' expectation.

"Our forecast from the beginning of the year was about 15 percent growth, or about 6.2 million passenger vehicles. We just revised our forecast down to about 5.95 million units," said John Bonnell, director of JD Power Asia-Pacific Forecasting.

According to CAAM, passenger vehicles sales in the first half stood at 3.6 million units, 17.07 percent up from the same period last year.

Inventories of unsold new vehicles in China rose about 50 percent to a four-year high at the end of June, as sales growth slowed unexpectedly while automakers boosted output.

The backlog reached 170,000 vehicles as of the end of June, the highest since the previous peak of 200,000 at the end of June 2004, according to China Securities Journal, which cited Cheng Xiaodong, chief auto analyst with the price monitoring center at the National Development and Reform Commission, as saying.