Beijing's latest tax cut to boost auto sector but at long-term cost
Beijing's tax cut and policy support expected to give car sector a short-term boost at the expense of long-term sales growth, if history is a guide
If history is any guide, the euphoria surrounding Beijing's recent cut in passenger vehicle purchase taxes, as witnessed by the rally in several Chinese carmaker share prices, is likely to be short-lived.
One week ago, the State Council announced it would halve the 10 per cent purchase tax on passenger vehicles with a 1.6 litre engine size or below between October 1, 2015 and December 31, 2016, along with renewing pledges to support new energy vehicles and encouraging the retirement of cars that fall short of new emission standards.
The news was a boost to the laggard share performances of Hong Kong-listed Chinese carmakers, notably Great Wall Motor and Geely Automobile, which rallied between 5 and 10 per cent in the three trading days since the tax holiday was announced.
The vehicle sector is among the first to put on the brakes when the economic engine slows down. Car production output and sales in China have contracted for four consecutive months since May in terms of year-on-year figures. Boosting the industry with lower taxes is also seen having a multiplier effect on the overall economy because with greater mobility comes greater consumption as people are more likely to travel or eat out.
CICC analysts estimate that the cut translates into a 72 billion yuan tax waiver for the car industry.
This is not the first time Beijing has rolled out similar measures to prop up the sector. As part of the four trillion yuan stimulus package in the aftermath of the 2008 global financial meltdown, the central government slashed the tax by 5 per cent. Subsequently, car sales growth shot up 53 per cent in 2009 and 33 per cent in 2010.
In the ensuing two years growth figures fell back to the pre-stimulus single-digit level, which Barclays analyst Yang Song noted in a report was a result of "demand partly pulled forward by the tax cut".
"If history is a reliable indicator of the future, we would expect sales to be boosted by the tax cut in [the fourth quarter of 2015] and 2016, but negatively affected in 2017, hence we see upside risk to our 2015/16 sales growth forecasts but see possible downside to our 2017 forecast," Song wrote.
Comparing past measures with the recent one, Jefferies analyst Zhi Aik Yeo noted the impact on the market was much more muted.
"We believe the government is hesitant to see a repeat of the big upswings in demand in 2009-2010 versus a very weak 2011-2012. This should serve as a reminder to investors that any pulled-forward demand would have to be repaid," Yeo noted.
Still, this doesn't mean a gloomy future for China's car sector. Medium to long-term growth potential continues to be robust, given the low vehicle ownership penetration, Fitch Ratings said in a report.
Passenger vehicle density stands at 80 per 1,000 people as of end-2014, well below 400 in Japan and the US and 300 in South Korea.
Fitch noted the difficulty for China to achieve penetration levels similar to developed markets given the country's uneven population density. Thus, the ratings agency expects car ownership to grow to 150 to 200 per 1,000 people over the next two decades, with incremental growth coming from smaller cities and the increasing popularity of SUVs and budget SUVs.
