Chinese auto sales are set to grow faster than expected this year, with some industry insiders now picking growth of 20 percent in the world's largest car market, raising talk Beijing will cut incentives to cool growth.

China's car sales zoomed nearly 50 percent last year, defying falling sales in the rest of the world, thanks in part to a series of government measures designed to stimulate spending during the global downturn.

Sales have continued to show strong growth this year, up 76 percent in the first three months, according to government data.

Industry watchers were initially predicting 10-15 percent growth for this year, but many have started revising those expectation upwards.

BYD (1211.HK), China's eighth largest car maker, is now expecting China's auto sales to grow by about 20 percent this year, said Henry Li, general manager of the company's export division.

Li was talking on the sidelines of an industry forum just before the start of this year's Beijing auto show, China's largest and the first held since it surpassed the United States last year to become the world's largest auto market.

Most of the world's top auto makers, including GM GM.UL, Ford (F.N), Toyota (7203.T) and Volkswagen (VOWG_p.DE), will attend, alongside China's own field of increasingly muscular names like SAIC Motor (600104.SS), BYD and Geely Automobile (0175.HK).

Li attributed his bullish forecast for this year to especially strong demand in China's smaller cities, which he expects will continue for the next five years.

BYD, formerly known for its cellphone batteries, has come from nowhere to become one of China's top selling automakers, selling nearly 450,000 vehicles last year, up 162 percent. Its F3 was the nation's best selling vehicle model.

CIMB-GK analyst Rebecca Tang said she also revised her growth forecast to 20 percent from 15 percent earlier this month after the strong start to the year.

The major concern is a slowdown in demand, she said. More capacity will come next year, and that could raise a concern about overcapacity by then.

BUILDING CAPACITY

Other automakers were also racing to increase capacity as China's market shows no signs of slowing yet.

Beijing Automotive Industry Holding Corp (BAIC), China's No. 5 automaker, and partner Hyundai Motor (005380.KS), will build their third manufacturing plant in China, BAIC's President Wang Dazong said at the industry forum.

He added that BAIC was also building a new plant to make vehicles using technology it recently acquired from GM's GM.UL money-losing Saab unit.

BYD, part owned by Warren Buffett's Berkshire Hathaway (BRKa.N), was getting ready to take its own show on the road, setting up a sales network in the United States as it prepares to sell its electric e6 vehicle there later this year.

But rapidly rising car sales may have Beijing reconsidering its incentives amid concerns that the sector might be adding too much capacity too quickly and becoming in danger of overheating.

A leading government researcher concurred that China car sales should grow about 20 percent this year, which may prompt the central government to reconsider its tax incentive policies.

If such strong growth continues, Beijing may scrap tax incentives for small cars next year, Xu Changming, director of the information resource department of the State Information Center, said at the forum.

The market was so good last year, Xu said. Actually growth last year was destructive for automakers and not good, he said, adding more moderate growth over 10 percent is considered healthy.

CIMB-GK's Tang said she wasn't too concerned about an end to incentives.

The government may end tax incentives next year, but it should have limited impact on the market, she said. (Additional reporting by Michael Wei in Beijing and Alison Leung in Hong Kong; Editing by Lincoln Feast)

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