SHANGHAI, China — Car buyers are rushing to place orders before China implements a new sales tax on vehicle sales.
The central government's decision to extend incentives to the auto industry into 2010 has been welcomed as a boon to the world's biggest car market, but some analysts worry that an accompanying tax revision might blunt the benefits.
The State Council, China's cabinet, announced last week that the sales tax on vehicles with engine capacities of 1.6 liters or less would be set at 7.5 percent in 2010. That's lower than the 2008 rate of 10 percent, but higher than the 5 percent imposed this year that is due to expire on December 31.
The government also said it will raise the subsidy to consumers who trade in old vehicles for newer, cleaner cars from a minimum of $875 to a maximum $2,600.
The tax incentives, introduced last February amid a global economic slowdown, have triggered a 42 percent surge this year in vehicle sales, which so far have broken the 12-million-unit milestone, catapulting China past the U.S. as the world's largest auto market.
Some analysts said industry euphoria may be tempered by the sales tax rate's move to 7.5 percent from its current 5 percent. The revision is seen as a government attempt to prevent the auto market from speeding out of control and to address problems associated with urban traffic congestion, energy consumption and capacity shortages.
Su Hui, former general manager of an auto trading market in Beijing, said the tax change won't be conducive to steady growth in the auto market because the financial crisis hasn't bottomed and the domestic auto industry isn't stable yet.
Yale Zhang, director of the auto consulting firm CSM Asia in Shanghai, agreed.
"The revised tax may diminish the attractiveness of car buying in inner cities because people there are very sensitive to purchase costs," he said.
The explosive growth in auto sales this year created supply problems in some areas, forcing consumers to pay more for cars and then endure long waits for delivery.
Vehicles with engine sizes of 1.6 liters or smaller contributed 85 percent of the industry's sales growth, the manufacturers' association said.
It estimates that government incentives this year boosted sales by 2.6 million units.
However, Dong Yang, executive vice chairman and secretary general of the association, said the 7.5 percent sales tax may damage the momentum of development for Chinese-brand vehicles and dent the industry's ambitious plans to produce more energy-efficient cars.
For the first 11 months of this year, sales of domestic-brand vehicles totaled 4.09 million units, accounting for 44 percent of passenger-car sales.
The majority of Chinese-brand cars are equipped with smaller engines and thus benefited most from the government incentives.
"The latest revision in the tax rate will impact sales of domestic brands in the short term and hurt the competitiveness of Chinese carmakers against international rivals," Dong said.
He also said the tax revision may prompt a flood of orders before the end of this year.
"That would lower sales for the first quarter of 2010 and create uncertainty about steady growth next year," Dong said. According to the State Administration of Taxation, robust auto sales in the first 10 months of this year boosted auto sales tax revenue by 12 percent and auto purchase tax revenue expanded by 6.3 percent.
Still, the Chinese Association of Automobile Manufacturers is predicting sales next year will top 13 million.
No major carmakers in China lowered sales forecasts for 2010 after the government's latest measures were announced.
"The whole industry is in an upbeat mood," said Jin Yibo, a spokesman for Chery Automobile. "We look to measures such as the rising subsidy to be a new driving force."
General Motors and Volkswagen had earlier estimated auto sales in China would grow between 10 percent and 15 percent next year.
Inside Line says: Could the Obama administration borrow a page from Beijing's playbook? — Vivian Jin, Correspondent
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tonkatoytruck says:
12:36 PM, 12/19/2009
Seems trivial considering there is no workmans comp., medical, dental, unemployement insurance, enforced child labor laws, or anything that resembles a level playing field in the automotive industry.
The attempt to raise taxes to address issues Amercians have been having to pay for years seems only promising that someday, we can once again manufacturer goods and still compete.