The city of Nanjing is planning to implement a ban on issuance of new car plates to address traffic congestion, according to a government report released on Monday.
Stakeholders of the automotive industry said that this move will dampen the already growing market.
Managing director of LMC Automotive, John Zeng, said that the policy will hinder Beijing's moves to grow the industry to become the world's biggest automotive market.
The Chinese economy has been slow and brought car sales down in recent years. To boost sales, the government has reduced taxes on small engine cars from October last year to the end of 2016.
"We are not expecting local governments to issue any policies against the policy from the central government," Zeng said, "so I would be surprised if they launched the policy this year."
The China Association of Automobile Manufacturers said that the tax reduction has led to an 8.1 percent increase of sales during the first half of the year. This is a big boost as the annual increase for 2015 was only 6 percent.
If implemented, Nanjing will be the first city since 2014 to issue plate restrictions. Seven other cities have done the same including Beijing and Shanghai.
This prompted car manufacturers to focus on lower tier areas and marketing of cheaper cars.
According to the government website, other restrictions such as setting a car travel schedule and imposition of car congestion fees will be implemented.
Yale Zhang, managing director at Automotive Foresight consultancy, said that car restrictions will make car owners more rushed to purchase.
"It can easily double or triple sales in the short-term, he said.
Based on the statistics from the China Association of Automobile Manufacturers, carmakers sold a total of 1.79 units in the first five months of 2016. These vehicles are sedans, sport utility vehicles and minivans.