China to Offer Tax Break on Cars to Revive Economy

Beijing considers halving taxes on vehicle purchases to spur sales growth

Workers load cars to be exported at a port in Lianyungang in China's eastern Jiangsu Province on May 31, 2018. -/AFP/Getty Images

The Chinese automotive market may get a boost from tax cuts as part of a stimulus plan amid slowing economic growth and an escalating trade war.

Authorities in Beijing are considering cutting taxes on vehicle purchases by half to revive faltering sales, according to a Bloomberg report that cites sources familiar with the matter.

The incentive would help spur car sales in the world’s biggest automotive market, which faces contraction for the first time in two decades, putting further pressure on economic growth.

Last month, China’s car sales, which are considered an important gauge for the health of the economy, sank 11.6 percent, which was the third consecutive decline.

Key drivers for the steep fall were a sluggish economy, deleveraging, and tougher emissions tests, according to the China Association of Automobile Manufacturers.

To reverse the trend, China’s top economic planning body is planning to cut the tax on car purchases from 10 percent to 5 percent. This incentive will be applied to vehicles with engines sized 1.6 liters or smaller, which accounted for nearly 70 percent of the total number of passenger vehicles sold last year, according to the report.

The China Automobile Dealers Association has been pushing the government to reduce taxes on car purchases.

Following the news, stocks of European carmakers climbed, setting the pace for the European markets. Daimler was up almost 5 percent and BMW was up more than 4 percent.

Share prices of the big three also soared: Ford Motor Company gained 6 percent, General Motors rose 4 percent, and Fiat Chrysler was up by nearly 2 percent in early trading on Oct. 29. The rally in Ford shares was also buoyed by a Goldman Sachs report that upgraded the stock from “neutral” to “buy.”

Trade War

The trade war with the United States is putting pressure on Chinese economic growth, and the automotive sector is a key area that has been damaged by the ongoing tariff dispute.

China recently lowered the levy on imported cars from 25 percent to 15 percent. It, however, raised tariffs on cars imported from the United States to 40 percent due to rising tensions with Washington. This raised concerns that the increased tariffs will result in a higher purchasing cost for Chinese consumers.

However, the impact of the trade dispute to the overall sales will be relatively small for Chinese consumers in the short term, according to a report by audit firm PwC, since imported U.S. cars account for less than 1 percent of all cars sold in China. Locally produced cars make up 96 percent of China’s market.

Despite the relatively small market share of imports, U.S. carmakers have a significant manufacturing footprint in the Chinese market of cars made locally. Auto exports to China were the third largest export category for the United States in 2017 after aerospace, and oilseeds and grains, according to the U.S. Census Bureau.

Due to the complexity of its supply chain, the automotive industry is more globalized than ever. Hence, the negative impact of the increased tariffs will trickle down through the entire supply chain and eventually lift the retail prices of many autos in the Chinese market, stated the PwC report.

Since his election in 2016, President Donald Trump has made trade renegotiations and reducing the trade deficit priorities of his administration. To meet his objectives, he began imposing tariffs on steel, aluminum, and Chinese goods. He has also ordered a national security investigation into car imports, which could result in tariffs of up to 25 percent on imported autos and auto parts.

Trump and Chinese leader Xi Jinping are expected to meet on the sidelines of next month’s Group of Twenty (G20) meeting in Buenos Aires. However, the White House may not address the ongoing trade war during the meeting, unless Beijing makes some progress in addressing Washington’s trade demands.

Global carmakers have recently cut their sales and profit forecasts for China, citing an uncertain economic outlook and trade tensions as key drivers. The sector overall has been negatively affected by a wider spending slowdown in China, as consumers are reluctant to spend money on big-ticket items due to the uncertainty.

Daimler lost more than a quarter of its value since its share price peaked in January this year.

Volkswagen Group, the world’s largest carmaker, cut its sales forecast recently. The group, which sold nearly 40 percent of its cars in China last year, reported that its sales were down 10.5 percent in September.

Ford Motor also announced that its sales dropped by 43 percent in China last month.

China’s auto sales increased by 13.7 percent in 2016, thanks mainly to a tax rebate. The sales, however, started to slow down when the tax break was phased out last year.