The move also comes after President Xi Jinping said last week the country would scrap ownership limits "as soon as possible", encouraging global auto brands even as a fierce standoff over trade intensifies between Beijing and Washington. While the restriction for commercial vehicles and passenger cars will be removed in 2020 and 2022, respectively.
The change is "a good stimulus to urge Chinese companies to strengthen their own brands at a faster pace rather than relying on the joint ventures to feed them", said Yale Zhang, an analyst with Automotive Foresight Co.in Shanghai.
Shares of German carmakers all gained on the news, reversing earlier losses. Volkswagen rose as much as 1.2%, and BMW and Mercedes-maker Daimler rose about 0.5%.
A senior General Motors executive last week said that the US carmaker, even without ownership caps, would not cut ties with local partner SAIC Motor Corp. Volkswagen said it will analyze if China's move leads to new options, saying its existing joint ventures won't be affected.
GM also said last week its growth in China was "a result of working with our trusted joint venture partners".
Tesla was not immediately available to comment on Tuesday.
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Elon Musk's Tesla, in particular, is in a position to benefit from the relaxed ownership rules.
However, Tesla and Shanghai officials have disagreed about the ownership of the proposed electric auto factory. The risk of higher import taxes spurred by Chinese trade friction with the US may be allayed if Tesla is able to clinch a local manufacturing agreement.
Analysts said the main beneficiaries, at least in the short term, would be manufacturers focused on new-energy vehicles (NEVs), including USA electric carmaker Tesla, which has been seeking to set up its own plant in Shanghai. "If Tesla produces from China, BYD may face the pressure to lower prices and thus a weaker margin".
The country lifting the 50 percent cap on the stakes that foreign automakers can own of local joint ventures sends a message to the Chinese partners: take charge of your own future. "It's not like 10 years ago, when foreign brands had a big technology advantage". The risk for the Chinese companies is that in a decade's time, the foreign brands will have become fully independent from them, he said. The removal of the cap signals Chinese officials now have more confidence in their home-grown contenders.
Still, with more than half of the record 24.8 million cars, sport-utility vehicles and minivans sold in China in 2017 carrying foreign nameplates, it's those companies that control the market.
While cranking up the pressure on US farmers, China also announced plans Tuesday to allow full foreign ownership of automakers in five years, ending some restrictions that have helped fuel its trade dispute with Mr. Trump as it promotes electric vehicle development.