UPDATE 2-China vehicle sales seen up a lacklustre 7 pct this year
* China 2012 vehicle sales up 4.3 pct
* Japanese carmakers continue to lose market share
* Inland China still presents major growth opportunity
* China passenger car sales to top 20 mln in 2020 -analyst
By Fang Yan and Jonathan Standing
BEIJING, Jan 11 (Reuters) - Vehicle sales in China are set to rise 7 percent in 2013, a third straight year of single-digit growth, an industry association said on Friday, as the fallout from a diplomatic spat continues to weigh on Japanese automakers.
Sales in the world's biggest auto market rose 4.3 percent last year, up from 2.5 percent growth in 2011. But that is still far below the robust double-digit expansion seen in 2009 and 2010 as a slowing economy and rising fuel costs weighed on demand.
China sales for Toyota Motor Corp and other Japanese carmakers initially tumbled by half after a territorial row caused an outbreak of anti-Japanese sentiment in mid-September. But while declines in sales have slowed, most industry analysts say they will likely continue to lose market share to other foreign rivals in 2013.
"People no longer take to the street or smash Japanese cars anymore and Camry, Accord or Infiniti models have again become an option. But a full recovery is going to be very difficult as long as the island dispute remains unresolved," said Sheng Ye, an analyst at industry consultancy Ipsos.
"That will drag down the overall car sales to some extent even though Korean, German and American brands have picked up some of the slack."
However, Dong Yang, secretary general of the China Association of Automobile Manufacturers (CAAM) was more optimistic, saying Japanese brands might make a full recovery this year.
"I think they can fully recover this year," Dong told a news conference. "As for whether it (the recovery) will be for the short-term or long-term, I think the ball is in the court of the Japanese government."
While total vehicle sales are likely to rise 7 percent this year, passenger car sales will do slightly better, climbing 8.5 percent, Shi Jianhua, CAAM's deputy secretary general, said.
The auto association forecast is roughly in line with a poll of senior industry executives in China conducted by gasgoo.com. According to that poll, half a dozen executives expect the overall vehicle market to grow at a single-digit pace this year while the other half predict growth of about 10 percent.
Further weighing on demand, more local governments may move to restrict car sales, an initiative already imposed in Beijing, Shanghai, Guangzhou and Guiyang to help ease traffic gridlock.
The most recent curb imposed in Guangzhou in August will cut the city's annual vehicle sales by a third.
Still, China -- which contributed to a third of light vehicle sales growth worldwide over the past five years -- presents automakers with huge opportunities due to the country's expanding urban middle class and low-car ownership in the country's sprawling inland areas.
In 2012, automakers shipped 19.3 million passenger cars, trucks and buses to dealerships in China, the association said.
In December, vehicle sales rose 7.1 percent from a year earlier to 1.81 million, slower than an 8.2 percent gain in November.
Passenger vehicles sales, which rose 7.1 percent to 15.5 million in the country last year, are expected to top 20 million in 2020, accounting for nearly 60 percent of the Asia-Pacific region's overall volume, according to Bill Russo, a senior adviser at Booz & Co.