Car sales party seen wind­ing down with ex­piry of tax cut

China Daily (Hong Kong) - - BUSINESS - By BLOOMBERG

Au­tomak­ers par­ty­ing to record sales in China this year are set for a reck­on­ing in 2017, with de­liv­er­ies poised to ex­pand at a third of this year’s pace. The rea­son: an in­crease in a sales tax af­fect­ing the big­gest seg­ment of the world’s largest auto mar­ket.

China raised the sales levy on small-en­gine cars to 7.5 per­cent on Thursday, curb­ing an in­cen­tive that has propped up the in­dus­try that’s headed for its 26th con­sec­u­tive an­nual ex­pan­sion. While the tax rate is less than the 10 per­cent orig­i­nally sched­uled to take ef­fect from Jan­uary, it is still an in­crease from the 5 per­cent rate in­tro­duced in Oc­to­ber 2015.

The tax re­duc­tion can trans­late to sav­ings equiv­a­lent to a few months of gaso­line on a new 119,800 yuan ($17,350) Ford Es­cort sedan, prompt­ing buy­ers of small-en­gine cars to bring for­ward their pur­chases ahead of the ex­pi­ra­tion of the tax cut at the end of this year. Ve­hi­cles de­liv­er­ies are on track to rise at least 13 per­cent in 2016, ac­cord­ing to the China As­so­ci­a­tion of Au­to­mo­bile Man­u­fac­tur­ers. The in­crease in de­liv­er­ies will slow to a range of 4 per­cent to 5 per­cent next year, based on the av­er­age of four es­ti­mates by an­a­lysts and in­dus­try as­so­ci­a­tion of­fi­cials com­piled by Bloomberg.

“By set­ting the rate at 7.5 per­cent, in­stead of hav­ing it units snap back to 10 per­cent, the gov­ern­ment is pro­vid­ing a cush­ion for sales to slow down with­out a crash land­ing,” said Yale Zhang, man­ag­ing di­rec­tor at re­searcher Aut­o­fore­sight Shang­hai Co. “They don’t want to see more con­gested cities with peo­ple buy­ing all these new cars.”

The tax hang­over will af­fect Geely Au­to­mo­bile Hold­ings Ltd and Great Wall Mo­tor Co dis­pro­por­tion­ately given the ma­jor­ity of their sales are small-en­gine cars, ac­cord­ing to San­ford C Bern­stein an­a­lyst Robin Zhu. Geely posted the fastest sales growth among ma­jor lo­cal au­tomak­ers with its de­liv­er­ies al­most dou­bling to 102,422 units in Novem­ber, while Guangzhou Au­to­mo­bile Group Co and Great Wall recorded sales in­creases of more than 30 per­cent last month.

A mea­sure of Chi­nese main­land au­tomak­ers traded in Hong Kong slumped for a sec­ond day af­ter Bloomberg re­ported on the planned tax in­crease.

For­eign car­mak­ers will also be hit by a soft­en­ing in de­mand. Gen­eral Mo­tors Co and Volk­swa­gen AG count China as their big­gest mar­ket for sales.

“Mass-mar­ket car­mak­ers like GM and VW will be more af­fected than lux­ury ones like BMW and Mercedes,” said Arndt Ellinghorst, a Lon­don­based an­a­lyst for Ever­core ISI. “There might be some weak­ness early next year af­ter some con­sumers bought early to still ben­e­fit from the in­cen­tive.”

Rep­re­sen­ta­tives for GM, VW, Daim­ler AG and Fiat Chrysler Au­to­mo­biles NV de­clined to com­ment on the im­pact of an in­crease in the sales tax be­fore an of­fi­cial an­nounce­ment. Geely and Great Wall didn’t im­me­di­ately re­spond to re­quests for com­ment.

Ford is pre­par­ing for dif­fer­ent tax sce­nar­ios and would like to see the tax in­cen­tive “con­tinue in some form,” said Mark Truby, a com­pany spokesman.

Chi­nese con­sumers bought 21.1 mil­lion pas­sen­ger ve­hi­cles in the first 11 months of the year, more than the 20.6 mil­lion units pur­chased in all of 2015, ac­cord­ing to the China Pas­sen­ger Car As­so­ci­a­tion. The last time China’s car mar­ket shrank was in 1990.

“The con­sen­sus of 4 per­cent sales growth in China next year seems op­ti­mistic to me,” said Matthew Stover, an an­a­lyst with Susque­hanna Fi­nan­cial Group in Bos­ton. “Peo­ple ex­pected these tax poli­cies to ex­pire so there’s been an ac­cel­er­a­tion of peo­ple buy­ing, a pull ahead of de­mand.”

Geely’s de­liv­er­ies in Novem­ber

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