New tax policies to help Chinese car industry

Following steady annual growth, in excess of 20-percent for some years now, China’s car sales began to fall in August of 2008 in line with global economic trends.

But for the Chinese, the market downturn is being seen as a blessing in disguise for prompting its government to adopt new polices for the sustainable development of the domestic industry.

With the American auto industry reeling from the credit crisis and subprime mortgage collapse, and the pain now spreading to Europe and Japan, China is receiving somewhat of a lucky break.

One of the reasons for this is the country’s low car ownership rate. It is estimated that China has fewer than 50 cars per for 1,000 people and although the demand for cars is temporarily suppressed, it is as a whole still surprisingly healthy.

More importantly, the current market downturn has spurred the Chinese government to make some long overdue changes in industry policies.

 

As China sources more than half of its oil supply from overseas, the government there, until quite recently, subsidised oil prices to keep them below international levels.

That fueled exuberant sales of uneconomical vehicles, for example, in the first half of 2008, SUVs sales nationwide surged 41-percent from a year ago, according to the China Association of Automobile Manufacturers.

But thanks to the current downturn of the global economy, crude oil prices have dropped to around $50US (340 yuan) per barrel on the international market. That provided the government the opportunity to raise the fuel tax.

Effective January 1 this year, the consumption tax of petrol was lifted to 1 yuan (15 US cents) per litre, from previously 0.2 yuan (3 cents), while that of diesel to 0.8 yuan (12 cents) from 0.1 yuan (1.5 cents).

Meanwhile, the government has also abolished most of the fixed fees charged on vehicles. These fees mainly include road maintenance fees, which are about 1,440 yuan ($210) a year per vehicle. They also include small surcharges levied on vehicles used for commercial purposes.

 

Shanghai continues to charge license fees, the only city to do so. License plates were auctioned at above 30,000 yuan ($4,400) in December.

Eager to boost car sales, the government is widely expected to soon replace the existing flat 10-percent vehicle purchase tax with one that varies according to engine size, something we seem slow to adopt here in Australia but which is very popular in the UK.

In addition, it is planning to offer incentives to stimulate trading of used cars and to encourage people to abandon old cars for newer, more efficient ones.

Of course, the government can always do more to fix some longstanding problems besetting the domestic auto industry, such as forcing inefficient state-owned automakers to close or merge with healthy companies, but thanks to the policy measures the government has taken since late last year, China’s auto industry will be able to grow in a more sustainable way once the economic recession ends.