China economy

China mulls 50 per cent cut in tax on car purchases to revive flagging market

  • Carmaker shares surge on possible policy change that would stimulate market amid escalating trade war
  • China car sales set to drop this year for first time in two decades
PUBLISHED : Tuesday, 30 October, 2018, 9:06am
UPDATED : Tuesday, 30 October, 2018, 9:06am

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’s been damaged by the trade war with the US.

Carmaker shares surged after Bloomberg News reported the proposal, which would stimulate a market they have increasingly relied on for growth. Volkswagen, selling just under 40 per cent of its vehicles in China last year, rose as much as 6.9 per cent, the biggest intraday move since July 2016. Ford Motor and General Motors rallied in US trading, while BMW and Daimler gained in Germany.

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The 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 countermeasures have led Volkswagen, Ford and Renault to all cut their outlooks, as sales in the country slid for four straight months. 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 people, declining to be named because the information is not public. China’s National Development and Reform Commission, 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 Juergen Pieper, a Frankfurt-based analyst with Bankhaus Metzler.

Ford climbed as much as 6.3 per cent on Monday, buoyed both by the China news and a Goldman Sachs analyst upgrading the stock to a buy. The company’s China sales have declined in 14 of the last 15 months. GM rallied as much 5.1 per cent.

The NDRC did not immediately respond to a fax seeking comment. Cars of that engine size accounted for some 70 per cent of the total number of passenger vehicles sold last year, according to the China Association of Automobile Manufacturers.

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Chinese car sales are on track for their first annual drop in two decades, after racking up growth records as an emerging middle class bought their first cars. The slowdown in China is just one of the challenges facing an industry that is also grappling with tougher emissions tests and the rise of the electric car. Daimler, the world’s biggest luxury-car maker, has lost almost quarter of its value this year. Shares in French supplier Valeo are down by almost 60 per cent.

Last week, Volkswagen warned that the trade tensions with the US are dragging on the market, prompting the German manufacturer to cut its forecast for industry sales in China. The company had forecast a 4 per cent expansion this year in the country, but recent data show the market to be flat or even lower for the year, it said.

As part of the economic stand-off with the US, China increased the levy on vehicles imported from America to 40 per cent. The country almost simultaneously lowered the duty on other imported cars to 15 per cent, leaving consumers confused about pricing and potentially lowering demand, according to the China Passenger Car Association.

Should the tax-cut plan go ahead, it would be the latest effort by China to support the $12 trillion economy, which has slowed this year amid the ongoing trade friction. In recent weeks, policymakers have tried to calm ructions in the stock market and acted to bolster private businesses by supporting bond issuance. Banks’ reserve-requirement ratios have been cut four times this year as a way of encouraging them to lend.

Passenger-car purchases by dealerships declined 13 per cent to 1.9 million units in September, according to the passenger car association. For the first nine months of this year, deliveries declined 1.1 per cent.

As the trade tensions take their toll, US President Donald Trump and Chinese counterpart Xi Jinping had agreed to meet on the sidelines of the next month’s Group of 20 leaders in Buenos Aires. With the talks still in the planning stages, the White House is considering excluding trade from the agenda of the pair until Beijing shows it’s serious about addressing the US’ list of negotiating demands.