China’s government will earmark a major portion of its Covid-19 economic stimulus plan towards spurring demand in the world’s largest vehicle market, extending a helping hand to an industry that accounted for one in six urban jobs.
The government will slash a car purchase tax to the tune of 60 billion yuan, about 42 per cent of the 140 billion yuan (US$21 billion) of tax rebates, loans, and deferred payments outlined by the State Council after its Monday meeting.
The cut, likely to halve the current tax from 10 per cent to 5 per cent according to consensus forecasts, may stimulate demand, leading to sales of an additional 1.8 million vehicles, analysts said. The State Council did not elaborate on its tax cut.
“The automotive sector is at a critical stage when government support is needed to stimulate sales,” said Chen Jinzhu, the chief executive of Shanghai Mingliang Auto Service, a consultancy. “Lockdown measures to contain the Covid-19 outbreak have crippled the vital industry, affecting millions of jobs.”
China has been the largest vehicle market on the planet since 2009 when it overtook the United States. Every global carmaker of note has a production venture somewhere in China, and the country is where Tesla chose to establish its first offshore assembly.
The industry took a deep dive last month, as Shanghai – dubbed China’s Motown for its 11 per cent contribution to the nation’s 2021 output – went into a citywide lockdown, which idled car plants from General Motors to Tesla and Volkswagen. Disruptions at component producers and engine makers idled car factories in Japan, South Korea and Europe.
Lockdowns in Shanghai and northeastern China’s Jilin province led to the lost production of 1 million vehicles last month, according to an estimate by the China Association of Automobile Manufacturers (CAAM), a major industry guild. Sales in Shanghai, one of China’s largest population centres, fell to zero in April.
Tesla’s Gigafactory 3 in Shanghai lost about 50,000 million units in production between March 28 and April 18, as it had to halt its operations to comply with Shanghai’s lockdown. Operations have resumed at half its capacity because of strained supply chains.
To kick the industry back to life, China’s government is reaching deep into its fiscal reserves. The last time the government slashed taxes – a 50 per cent cut in 2016 – sales jumped by 21.4 per cent to 17.6 million units.
The tax cuts will become effective soon, analysts said, benefiting vehicles fitted with internal combustion engines (ICEs) smaller than 1.6 litres, where a 10 per cent tax applies. So-called new energy vehicles (NEVs), comprising purely electric, plug-in hybrids and fuel-cell cars are exempted from tax.
“It is a serious issue if low-income consumers stop buying new cars because it will deal a fatal blow to entry-level vehicles in the market,” said Cui Dongshu, general secretary of the China Passenger Car Association (CPCA). “The ICE car segment needs to be supported at a time when NEVs are siphoning off buying interest.”
Cheng Siqi, an analyst with China Securities, wrote in a research note on Tuesday that the tax incentive could generate additional sales of up to 1.8 million passenger cars this year.
Beijing is mulling over a plan to extend subsidies for NEVs that are set to expire in 2022, Reuters reported last week.
An all-electric car with a driving range of more than 400 kilometres is now eligible for a 12,600-yuan subsidy, according to the Ministry of Finance.