Sales tax on vehicles with engines of less than 1.6 liters will be halved and exchange of old vehicles for new ones with smaller engines subsidized to boost the auto industry.

A total of 5 billion yuan ($731.45 million) will be set aside for the subsidy to be given to farmers. And sales tax will be cut from 10 percent to 5 percent from January 20.

The stimulus package for the country's auto industry, the third largest in the world, was announced by the State Council yesterday after its sales growth fell to a 10-year-low of 6.7 percent last year.

The package is expected to boost the steel industry and designed to promote fuel-efficient and low-emission vehicles, too.

"In order to adjust and revive the auto sector, we must implement a proactive consumption policy to stabilize and boost auto demand," the State Council said.

"Any unreasonable rules" hampering auto sales would be removed in order to spur demand.

The government said it would support the alternative-energy vehicle sector by promoting the mass production of electric-powered cars in big and medium cities.

In the next three years, the government will provide 10 billion yuan ($1.5 billion) to automakers to help upgrade their technology and develop alternative energy vehicles.

The move, likely to benefit more than 80 auto- and steel-related firms in Shanghai and Shenzhen, is part of a series of industry specific policies to stimulate the economy.

The government is expected to release supportive policies for eight other industries, including shipbuilding, petrochemicals and textiles in the next few days.

Analysts said the package announced yesterday would help the two pillars of the national economy immensely. "The wide-ranging supportive measures will certainly give the auto industry a shot in the arm," said Jia Xinguang, a Beijing-based auto analyst.

"But it's hard to say how big an impact it would have in the short term", he said.

About 9.38 million vehicles were sold in the country last year against a target of 10 million.

The slump in demand saw the combined January-November profit of the country's 19 biggest automakers fall 0.5 percent year-on-year to 65.6 billion yuan, the China Association of Automobile Manufacturers (CAAM) said on Monday.

A quarter of the 45 carmakers tracked by the association failed to reach even half of their annual sales targets, CAAM said.