Tax cut for small models drives Chinese car sales

The Financial Times, November 11, 2015

Patti Waldmeir in Shanghai

Tax cut for small models drives Chinese car sales - FT.com Mail, Today at 11.13.18 AM

Beijing’s stimulus plan for the Chinese car market helped October motor vehicle sales to grow at their fastest pace in 10 months, driven by a tax cut on small cars.

Chinese car buyers have been holding back on purchases of big-ticket items such as cars, while consumer spending on other items remained strong on the mainland, which today celebrated another record “single’s day” shopping holiday.

However, the industry has seen some signs of recovery in recent months, with October motor vehicle sales rising 11.8 per cent year-on-year, to 2.2m vehicles, according to the state-backed China Association of Automobile Manufacturers. This was an acceleration from the 2.1 per cent pace recorded in September.

Sales of sport utility vehicles, the fastest-growing segment and a car popular with the rapidly growing middle class, rose more than 60 per cent in October over the same month a year ago.

Bill Russo, a motor industry consultant in Shanghai, said: “There’s a bounce because of the tax reduction and . . . there has been a trend, even in the slowdown period, of high growth in SUVs, particularly recently launched vehicles in that category are doing quite well.”

Beijing is counting on consumers to boost economic growth as the Chinese economy shifts toward more consumption-led growth. But sentiment among car buyers had been more negative than that affecting other consumers in recent months, with some saying they were waiting for prices to fall.

Beijing responded to weak demand by halving the tax on vehicles with engines of 1.6 litres or smaller to 5 per cent — a measure in place until the end of next year. The tax cut came into effect on October 1.

China’s leaders adopted a similar strategy of cutting taxes on small-engine vehicles in response to the 2008 global financial crisis, launching several boom years for the Chinese car market.

Mr Russo said: “The tax reduction is . . . designed to do two things, stimulate demand in a slowdown but also encourage people to buy a higher mix of locally branded cars” since local automakers’ product portfolio is skewed towards the smaller end.

Tax cuts are likely to boost demand from now until the end of 2016, he said, but added: “My concern is what happens to demand in years to follow, demand may be pulled forward from 2017 into 2016.”

But Yu Jianliang, an independent motor industry analyst, predicted that the boost might not last all next year. “The market is now in the downswing of the business cycle so the policy effect might only last for half a year,” he said. Carmakers were also trying to attract customers by offering more flexible instalment terms and reducing commission charges, he added.

 Additional reporting by Jackie Cai

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