A huge opportunity has been created by the Chinese government’s long-awaited new regulatory policy on the country’s automotive industry. Beijing could not only promote the development of a world-class sector composed of both state-owned and private companies but also—and more important—ensure that Chinese consumers have access to the high-quality, affordable automotive products that people around the world have long taken for granted. To achieve these objectives, however, the government must fundamentally shift the focus of its current industry policy and rethink some provisions of the new one now circulating in draft form.

At stake is the Chinese market, which now has the world’s highest sales-growth rate for vehicles. Indeed, by 2010 China will become the world’s second-largest automotive market, trailing only the United States. The way the new policy is implemented could have a huge impact on the Chinese and multinational automakers and suppliers operating in the country and on the millions of Chinese consumers who will purchase cars during the next few years.

The government’s current policy, now a decade old, certainly had admirable intentions: to encourage the transfer of technology from multinational to domestic manufacturers and to develop an indigenous state-owned automotive industry supported by—but not competitive with—foreign...