In early 2009 a similar situation was unfolding, consumer confidence in China was retreating as Western countries were mired in economic woes that pulled back on purse strings which ultimately slowed down Chinese exports, cars were sitting unsold on dealership forecourts but the heavy hand of government intervened with healthy tax cuts on sub 1.6L vehicles leading to China becoming the world’s biggest car market. Fast forward three years, the same situation is unraveling once more, will the government put its hand in the game once more, or do they truly believe that the Chinese car market is mature enough to make it on its own this time?

From Bloomberg:

Carmakers are giving Chinese dealers no relief in their effort to reduce a glut of unsold automobiles in a slowing economy, as factories pump passenger vehicles into showrooms faster than distributors can sell them.

Wholesale deliveries, including multipurpose and sport- utility vehicles, climbed 23 percent from a year earlier to 1.28 million units in May, the China Association of Automobile Manufacturers said June 9 in Beijing. That beat the 1.2 million average estimate of seven analysts in a Bloomberg survey, the third straight month shipments exceeded forecasts.

The surge, led by Toyota Motor Corp. (7203) and Honda Motor Co. (7267) as they recover from last year’s natural disasters, may raise pressure on distributors to deepen discounts and sell cars at a loss to meet mandatory targets set by automakers. Factory managers may have to slow production unless the discounts and potential government policies to encourage sales ease the glut.

“If there’s a bottleneck out the retail channel, obviously that at some point comes back and you have to cut production,” said Kevin Tynan, an automotive analyst at Bloomberg Industries. “Something has to give. Either you’re going to incentivize the consumer to buy, whether that’s the government or the manufacturers, or you’re going to have to pull back on production somewhere, and it doesn’t sound like the manufacturers are in a big hurry to do that.”

The carmakers and state-backed CAAM say they’re confident demand is picking up. Automakers such as General Motors Co. only disclose the number of vehicles sold to Chinese dealers — instead of consumers. Most carmakers use sales to dealerships to calculate revenue, according to Gao Song, an analyst with Citic Securities Co. (6030) in Beijing.

“There are clear signs indicating the industry is becoming more stable,” Deputy Secretary General Yao Jie said in Beijing. “For the first time this year, accumulative sales and production have exceeded that of a year earlier.”

For the first five months, passenger-vehicle sales increased 5.5 percent to 6.33 million units, according to CAAM.

Sport-utility vehicles registered the biggest wholesale delivery growth by category, rising 58 percent to 162,600 units in May as sedan sales rose 20 percent, according to CAAM. Minivans, which are used as passenger and commercial vehicles, rose 16 percent to 185,700 units, the association said.

Toyota’s China sales in May more than doubled to 78,700 units. Honda reported a 92 percent surge and Nissan Motor Co. (7201)’s sales increased 20 percent. Last year, production at the Japanese automakers was hurt by the earthquake and tsunami in Japan and floods in Thailand.