The market for cars in China is likely to reach overcapacity within two years, industry experts at KPMG warned yesterday.

The Chinese market has been flooded with investment from all the world's major producers during recent years, attracted by the potential profits in one of the car world's few regions of growth.

Now, analysts are concerned by the risk of oversupply, as Paul Brough, the managing partner of KPMG's financial advisory services practice, has said.

'Overcapacity will be a major factor within two years, with the passenger car market - already the single most important sector within the Chinese vehicle market - likely to be at the forefront.'

This caution comes despite his prediction that, following a shipment increase of 2.9 million units in eight years, sales will grow at an annual rate of eight per cent between now and 2015.

The problem lies in the fact that all major producers are rushing to exploit the predicted boom, and the consequences are likely to be felt soon:

'Even with car sales forecast to hit 1.8 million in 2003, there is potential overcapacity in the market of nearly one million units, or 50 per cent of forecast sales', say the company's analysts.

That overcapacity is likely to rise by 2.3 million units - or a 'staggering' 90 per cent of forecast sales - by 2005.

Over $10 billion of investment has been earmarked by foreign carmakers in China for the next few years, with Volkswagen the biggest player at a 38 per cent market share.

The first signs are already visible, according to Mr Brough, in the form of a even per cent price decrease during the first half of this year:

'Further overcapacity will see increased price pressures on sedans as well as lower prices and margins. Taking the resourcing to its ultimate extreme also raises the fear of some new production facilities becoming real white elephants as capacity is inevitably scaled back at some point.'