Chinese regulator eyeing 50% cut to car purchase tax amid trade war

A car assembly plant in China. The world's largest automotive market is facing its first decline in more than two decades as a trade war with the US hits consumer spending power.
A car assembly plant in China. The world's largest automotive market is facing its first decline in more than two decades as a trade war with the US hits consumer spending power.PHOTO: REUTERS

BEIJING • China is considering a tax cut to revive its flagging automotive market, according to people familiar with the matter, lending support to a key industry that has been damaged by an ongoing trade war with the United States.

Carmaker shares surged after Bloomberg News reported the proposal.

Among Chinese carmakers, Great Wall Motor jumped as much as 6.9 per cent, Geely Automobile Holdings gained up to 6 per cent, and Guangzhou Automobile Group rose as much as 4.4 per cent in Hong Kong yesterday.

Volkswagen, which sold just under 40 per cent of its vehicles in China last year, as well as BMW and Daimler, gained in Frankfurt trading on Monday. Ford Motor and General Motors rallied in the US.

The Chinese move would help shore up the world's largest automotive market, which is facing its first decline in more than two decades as a trade war with the US hits consumer spending power.

A torrid few months of escalating trade countermeasures have led Volkswagen, Ford and Renault to all cut their outlooks, as sales in China slid for four straight months.

  • 5%

    Proposed tax for car purchases - half of the tax now in place - to counteract the slowdown in China's car industry damaged by the trade war with the United States.

Tensions with the US have started to ripple more broadly through China's economy and its stock market, showing a more direct impact than on the US.

To counteract the slowdown, China's top economic planning body is proposing to halve the tax on car purchases to 5 per cent. The measure would apply to cars with engines no bigger than 1.6 litres, said the sources, who declined to be named because the information is not public. China's National Development and Reform Commission (NDRC), also the top regulator, has submitted a plan but no decision has been made, they said.

 
 
 

"This is definitely good news and a message the market has been waiting for," said Mr Juergen Pieper, a Frankfurt-based analyst with Bankhaus Metzler.

China made a similar cut to the car purchase tax in September 2015. If stimulus is announced in the coming weeks, the 2015 experience suggests expectations for 2019 industry sales could be revised higher by up to two million to 2.5 million units, or as much as 10 per cent, Sanford C. Bernstein & Co analysts wrote in a note dated Monday.

This would mean "mid-single-digit growth" next year compared with current expectations for a "modest decline", they wrote.

The NDRC did not immediately respond to a fax seeking comment.

Cars of that engine size made up some 70 per cent of the total number of passenger vehicles sold last year, said the China Association of Automobile Manufacturers.

Passenger car purchases by dealerships fell 13 per cent to 1.9 million units last month, said the passenger car association. For the first nine months of this year, deliveries fell 1.1 per cent.

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A version of this article appeared in the print edition of The Straits Times on October 31, 2018, with the headline 'Chinese regulator eyeing 50% cut to car purchase tax amid trade war'. Print Edition | Subscribe