HONG KONG—China’s passenger car retail sales shrank almost 20% in the first two months of this year, underscoring the challenges facing manufacturers in the world’s largest but long-stuttering auto market. The nation’s auto makers sold 2.7 million passenger cars in January and February combined, according to the China Passenger Car Association, down from 3.3 million a year earlier. Makers of plug-in hybrid and battery electric cars fared better, seeing sales rise 23% in January and February from the same period a year ago.