After years of blistering sales growth, China's auto industry is still healthy.

But inflation, a housing bubble and unpredictable government policies could cripple the economy -- and the auto industry along with it.

After two years of 30 percent annual gains, analysts expect auto sales to rise at a more sustainable 10 to 15 percent this year. A key assumption is that China's economic growth will remain strong, but now this assumption has been called into question.

The biggest challenge is inflation. In November, the government estimated inflation was rising 5 percent on an annualized basis, but independent researchers believe the real inflation rate is twice as high.

Another major challenge is the upward spiral of housing prices. Over the past five years, housing prices in major Chinese cities such as Beijing and Shanghai have more than doubled.

To ease inflation and cool the overheated property market, the government raised interest rates and restricted mortgage lending, but to no avail. Last year, housing prices in Beijing and Shanghai surged 42 percent to $3,000 (19,800 yuan) per square meter.

The auto industry also must wrestle with unpredictable policy changes.

China traditionally has taken an interventionist approach toward development of the domestic auto industry. But what really hurts the industry is the government's frequently changing policies.

In 2008, for example, Beijing pledged to subsidize the purchase of hybrids, electric cars and fuel-cell vehicles. But in 2010, it changed its mind and downgraded fuel cells in favor of plug-in hybrids and electric vehicles.

Under a pilot program enacted last June, car buyers can receive a subsidy up to 50,000 yuan for plug-in hybrids, and 60,000 yuan for pure electrics.

By contrast, the government offers only 3,000 yuan to buyers of conventional hybrids, and zero for purchases of fuel-cell vehicles.

This policy change caught all automakers unprepared. For example, Changan Automobile Co. had built a production line capable of producing 10,000 hybrids a year.

The new policy means huge investment losses for Changan, which has idled the production line because it can't sell any of its hybrid vehicles.

Last month, the municipality of Beijing offered us another example of the havoc that sudden policy changes can cause.

To ease severe traffic congestion, the city government gave one week's notice that it would restrict the sale of new cars to 20,000 units per month at the start of January.

As a result, as many as 80 of Beijing's 420 franchised car dealers will go out business this year, according to the China Automobile Dealers Association (CADA).

To be sure, underlying consumer demand for vehicles remains strong in China. The nation's average car ownership rate is still below 50 units for every 1,000 people, well below western countries. And the Chinese economy is still rapidly industrializing.

But rising inflation, soaring housing prices and unpredictable government policies are casting a shadow on the world's largest auto market.