Chinese policymakers haven't discussed extending a key tax cut beyond the end of this year for some vehicle purchases, China's industry minister said Thursday, noting that subsidies offered for replacing old cars could help sustain demand for automobiles next year.

The comments could indicate the tax break, which has been behind soaring auto sales this year and is part of Beijing's efforts to stimulate domestic demand and encourage buying of more fuel-efficient cars, may be discontinued when it expires.

This could lead to a possible drop in sales in the Chinese auto market next year as the tax break remains the most effective measure in spurring car purchases in the world's third-largest economy. Other policies, such as the "replace old with new" program rolled out by Beijing in June, haven't had the success that the U.S. government's similar "cash for clunkers" program had in stimulating demand, analysts said.

Beijing halved the purchase tax on cars with engines of 1.6 liters and smaller to 5% in January.

While the tax cut provides modest savings for consumers of CNY4,000-CNY5,000 per vehicle, it costs the country CNY12 billion ($1.8 billion) for the year, Li said.

"When the (tax break) policy was being decided, there were already many finance and taxation policies being announced," said Minister of Industry and Information Technology Li Yizhong in a news conference. "The Ministry of Finance is very supportive, but to spend CNY12 billion is a major decision."

"The policy is set to end on Dec. 31. Whether or not this can be extended currently has not been discussed."

The tax cut, as well as China's recovering economy, has helped passenger auto sales rise 30.9% in the first seven months of this year to 5.36 million vehicles, while sales in developed countries have declined amid a global economic crisis.

Li acknowledged that the policy has helped auto sales in China exceed 1 million vehicles in each month from March to July.

The policy has significantly boosted sales volumes of foreign auto makers in China, with eligible small models selling better than others.

The tax cut helped General Motors Corp. (GM) achieve its best July ever in China, with sales rising 77.7% from a year earlier to 144,593 vehicles. For the first seven months, GM's sales were up 42.8% from a year earlier to 959,035 units.

Demand was especially strong for its mini-commercial vehicles. Sales at the joint venture that makes the vehicles, SAIC-GM-Wuling Automobile Co., rose 90.7% in July to 87,925 units. All of the joint venture's products qualify for the tax cut.

Nissan Motor Co.'s (NSANY) sales also benefited, with sales at its joint venture with Dongfeng Motor rising 41.3% in the first half of the year to 225,073 units, while sales rose 42% in June to 44,753 units.

China's subsidies to encourage residents in rural areas to replace their old cars with new ones should continue to help support the auto industry, as well as its nationwide "replace old with new" program, Li said.

However, these policies are unlikely to be as effective as the purchase tax cut in boosting auto sales, said CSM Worldwide analyst Yale Zhang.

While the U.S. "cash for clunkers" has been hugely popular, with Congress approving an extra $2 billion on top of an initial $1 billion to fund the program, China's version, effective from June this year through May 2010, is more limited.

China has allocated less funding - CNY5 billion ($732 million) - for its program. Consumers can't qualify for more than one incentive program. If they benefit from the 5% purchase tax cut, they won't receive an additional subsidy.

Also, Chinese consumers may only receive subsidies of up to CNY6,000 ($880) per vehicle, compared with $3,500-$4,500 in the U.S.

Auto owners in China may find it more worthwhile to sell their car on the second-hand market, Zhang said.

Industry observers say such consumer incentives may simply be pulling forward future demand, setting the industry up for a sales drop when the incentive is rescinded.

"If the tax cut is stopped, fourth-quarter sales will be super strong, and then we'll see a very weak first half," said Zhang.

China's central government is likely to announce by the end of this year a consumer incentive program to expand the use of all-electric battery cars and other alternative-energy cars in China, an adviser to the Chinese government said in April.

"Measures to encourage consumers to buy more new-energy vehicles are still in the making, but they should be released by the end of this year," said Huang Yonghe, a director at the China Automotive Technology & Research Center. "At the least they should take clear shape by then."