China said Wednesday it will halve purchase taxes on vehicles with small engines, in an attempt to boost sales in the world's largest car market where demand has weakened.

Car sales in China have been falling for five straight months since April as expansion of the world's second-largest economy has slowed.

The cut effective from Thursday applies to passenger cars with engines of 1.6 litres or less and seating fewer than ten people, the finance ministry said in a statement.

The policy -- which sets the sales tax at five percent -- will last until the end of next year, it added.

Number plate restrictions in some major cities to ease traffic gridlock and volatility on China's stock exchanges have weighed on demand.

Industry group the China Association of Automobile Manufacturers reportedly said it expected sales to decrease this year.

The tax incentive comes after China's state council said Tuesday it would offer support for "new energy" cars, by lifting license restrictions in an attempt to "cultivate new economic growth drivers".

China imposed a similar tax cut in 2009 during the aftermath of the global financial crisis, which helped China to overtake the United States as the world's biggest car market. The policy was scrapped in 2011.

The tax announcement is expected to help German carmaker Volkswagen -- which is embroiled in an emission-cheating scandal worldwide -- as China represents more than a third of their global sales.

Fears about decelerating growth in the Chinese economy, a key driver of global growth, have rocked stock exchanges around the world in recent weeks.

The economy expanded 7.3 percent last year, the weakest pace in almost 25 years. Growth slowed further this year, according to official figures.

The finance ministry this month said it will adopt "stronger" fiscal policies to support the economy and Premier Li Keqiang later tried to soothe jittery investors by promising that the country "will not head for a hard landing".

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