Auto sales in China have weakened driven by a territorial dispute, sluggish economy and stringent government policy on vehicle registration. According to China Association of Automobile Manufacturers (CAAM), sales of passenger vehicles fell 1.8% year over year to 1.62 million units in the country in September.

Sales of Japanese automakers plunged during the month triggered by the conflict between Beijing and Tokyo over a group of uninhabited islands in the East China Sea that led buyers to avoid purchasing their vehicles.

Among the major Japanese automakers, Toyota Motor Corp. ( TM - Analyst Report ) sales plummeted 48.9% to 44,100 units; Nissan Motor Co. ( NSANY ) sales tumbled 35.3% to 76,066 units; Honda Motor Co. ( HMC - Analyst Report ) sales nosedived 40.5% to 33,931 units. Among others, Mazda Motor Corp. sales dipped 35%, Mitsubishi Motors Corp. sales went down 63% and Suzuki Motor Corp. sales declined 43% in the month.

Among the major foreign automakers, General Motors Company ( GM - Analyst Report ) sales went up a meager 1.7% to 244,266 vehicles. GM operates joint ventures with China’s FAW Group and SAIC Motor Corp.

However, Ford Motor Co. ( F - Analyst Report ) and Volkswagen AG ( VLKAY ) posted impressive sales growth in September. Ford sales surged 35% to 59,570 vehicles while Volkswagen’s luxury unit Audi sales went up 20.5% to 35,512 vehicles during the month.

Auto sales in China had grown at a double-digit pace since 1999, except in 2008 when the global economic crisis crept in. In 2009, China overtook the U.S. as the biggest auto market in the world by sales volumes when the Beijing government introduced a stimulus package, including tax incentives for small cars with engine sizes of 1.6 litres or smaller.

However, the incentives were scrapped last year and the Beijing government imposed quotas on new car registrations in order to control the traffic congestions. As a result, new car deliveries plummeted 56% to 403,500 units in 2011.

Nevertheless, China’s automotive industry outlook is promising in 2012. According to CAAM, passenger car sales in 2012 is expected to grow by 9% in the country, which is much higher than 2011 (2.5%).