End of tax break could put breaks on Chinese car sales

Daiwa Capital Markets says average daily sales of passenger vehicles in China rose 28pc in the first three weeks of July

PUBLISHED : Wednesday, 03 August, 2016, 7:30pm
UPDATED : Wednesday, 03 August, 2016, 10:48pm

Chinese car sales remained robust in July, according to new figures — but analysts are now warning of a possible U-turn in business, after a key tax break for buyers expires at the end of the year.

Average daily sales of passenger vehicles in China rose by 28 per cent in the first three weeks of July compared with the same period a year ago, an improvement from June’s 18 per cent, according to the latest data compiled by Daiwa Capital Markets.

China cut sales taxes by half on cars with engines of 1.6 litres or less last October in a move to help stimulate the car market. That tax cut is set to expire at the end of 2016.

Industry analysts at Haitong International Research, say they are projecting 10 per cent annual growth in passenger vehicle sales in China, further supported by the tax cut.

“However, that expires at the end of 2016 and then we forecast a 4 per cent fall in sales in 2017,” warned the company’s Ole Hui and Lily Li in a note.

We attribute this to consumers bringing forward their purchases to 2016 in order to benefit from the tax cut as well as the high base of comparison following rapid growth in recent years
Ole Hui and Lily Li, Haitong International Research

The July sales uptick is also being driven by strong demand for sports utility vehicles, said Haitong, whose figures suggest SUV sales in China rose by 54 per cent to 6.3 million units in 2015, and by 44 per cent in the first half of 2016.

But the company predicts the breaks will be put on those too next year, with SUV growth slowing to 8 per cent in 2017.

“We attribute this to consumers bringing forward their purchases to 2016 in order to benefit from the tax cut as well as the high base of comparison following rapid growth in recent years,” analysts at Haitong said.

Figures in the MNI China Car Purchase Indicator, a composite gauge of overall conditions in the domestic car market, recently showed its car sales confidence indicator declined 4.5 per cent to 87.8 in July from 92.0 in June, the lowest reading since January.

It said the fall shows households are increasingly wary about making large purchases in an uncertain economic environment. It added Chinese families are cutting their budgets on cars, with more expensive models losing popularity.

Toyota has already reported July sales growth of 5.7 per cent to about 97,700 vehicles in China, following a decline of 3.4 per cent in June. While Honda posted a China sales increase of 39.5 per cent during the month.

According to the Daiwa Capital Markets report, local brand Geely recorded a 115-per-cent growth from July 1 to July 22, supported by its new SUV products.

BMW Brilliance’s sales also rose by a 32 per cent year-on-year during the period, while Great Wall Motor saw sales increase by 74 per cent, both helped by strong SUV purchases, Daiwa said.

Citi Research recently raised its rating on Dongfeng Motor, one of China’s biggest automaker to “Buy”, adding the company could achieve double-digit growth in the first half of 2016.

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