The draft rules (link in Chinese) propose to allow dealers to sell Chinese-made cars without permission from manufacturers, and would prevent manufacturers from imposing sales targets on dealers.
The rules have been put together to ensure fair competition and promote healthy development of the market as well as to protect consumers, the Ministry of Commerce said.
Contracts with manufacturers would have to run for at least five years under the proposed rules. Manufacturers would also no longer be able to stop dealers from selling cars to one another, and the forced sale of insurance to consumers would be outlawed.
The Ministry of Commerce is also keen to accelerate the development of an integrated sales and service network in both urban and rural areas, and to encourage innovation and e-commerce in car sales.
Sales and after-sales service for 'new energy' cars should also be strengthened, it said.
A "Three Guarantees" warranty system introduced in 2013 will continue to protect consumers on repair, replacement and refunds, according to the draft rules.
"Car dealers in China have less say and more restrictions than their foreign peers," China-based motor industry analyst Yu Jianliang told the Financial Times. "But now the industry is in a downturn and dealers are complaining a lot about pressure on their business. The draft policy could ease that."
Shanghai-based Bernd-Uwe Stucken of Pinsent Masons, the law firm behind Out-Law.com, said that the new rules were not a big surprise.
"The dealership contracts of the big automotive manufacturers were quite tough and not all were in line with Chinese competition law. Nobody cared when the market was growing. The dealers could sell whatever they got. Now, however, the market has turned and previous binding sales targets have become unrealistic. Many manufacturers have already adjusted the targets to prevent more painful government interventions," Stucken said.
Comments on the proposal can be made until 6 February.