The Stimulating Effect of the Vehicle Purchase Tax Halving Policy and the Outlook of China's Auto Market

How strong is the stimulating effect of the policy of halving the purchase tax? On December 10, the China Association of Automobile Manufacturers (CAAM) released the production and sales information for the month at its monthly information conference. According to the data, the policy of halving the purchase tax for passenger cars of 1.6L and below, which was implemented in October, has stimulated the auto market to a certain extent. The auto sales increased by 11.8% in the same month, and in November, it set a new record.

According to the CCA, the sales of 1.6L and below passenger cars in November amounted to 1,556,600 units, an increase of 16.5% over the previous month, 3.1 percentage points higher than the overall growth rate of passenger cars, and a rise of 29% year-on-year, 5.3 percentage points higher than the overall growth rate of passenger cars. 1.6L and below passenger cars accounted for 70.9% of passenger car sales in November, 1.9 percentage points higher than the previous month.

Nevertheless, the overall situation of the auto market this year is not optimistic, and Dong Yang expects the annual growth rate to be around 3%. This maintains the previous July, CCA's estimate of the car market. Obviously, without the implementation of the purchase tax halving policy in October, the car market this year may be a very difficult situation. However, under the stimulation of the policy of chicken blood, the auto industry may take a sigh of relief next year.

When it comes to next year's car market forecast, Dong Yang, executive vice president and secretary-general of the China Association of Automobile Manufacturers (CAAM), said optimistically that the official forecast data from CAAM is not yet available, but he believes that it will be in the range of 5% to 7%, and there will not be double-digit high growth. This figure is about 1 times more than this year's 3%. However, Dong Yang also brought "bad news" - the recent auto industry stirred up a moment of "car to the countryside" policy restart is only a rumor.

"I just attended the State Council's symposium on the economic situation, and I have not heard that a new round of auto rural policy will be launched. In the December 10 CCA monthly information conference, Dong Yang told reporters.

Previously on Dec. 9, Bloomberg reported, citing people familiar with the matter, that China plans to launch a new round of auto rural policy to include passenger cars under 1.6 liters, micro passenger and cargo, pickup trucks, and other light trucks in the product range. China also plans to increase the construction of parking lots and new energy vehicle charging infrastructure. Stimulated by this news, the A-share auto sector performed strongly that day, with Changan Automobile, Jianghuai Automobile, SAIC Group, BYD, etc. all showing significant gains.

In 2009, the country introduced the policy of "automobile going to the countryside", the specific content of which is, in addition to the 5% vehicle purchase tax on passenger cars of 1.6 liters and below sold from January 20 to December 31, 2009, the country also arranged 5 billion yuan of funds for farmers to scrap three-wheeled vehicles and low-speed trucks for light trucks. Low-speed trucks for light trucks and the purchase of 1.3 liters or less displacement of microbus to give one-time financial subsidies. The policy ended on December 31, 2010.

Since then, China's auto market has entered two years of rapid development, but this has also sown hidden dangers for the industry's development.

The rapid growth after 2009 also brought about a blind expansion of production capacity, and in 2010, Chinese auto companies planned and implemented an expansion of 32 million units by 2015. By the end of this year, the domestic market can only absorb 23 to 24 million vehicles, plus 800,000 to 1 million vehicles for export. Capacity utilization is at most 75 to 78 percent, with 7 to 8 million units of spare capacity. Especially autonomous brands have begun to taste the bitter fruit of blind expansion.

Industry insiders say that the auto industry chain must remain calm, regardless of the policy of halving the purchase tax or the stimulus policy. Shen Rong, deputy secretary-general of the China Automobile Dealers Association, warned that manufacturers and suppliers should not take the short-term policy of "halving the purchase tax" as a long-term strategy.

"(The policy) short-term pry a little demand, but the lack of demand is due to the decline in income expectations resulting in a decline in consumer demand." Shen Rong said.