Favorable policy to expire next month

China's favorable policy on car purchase tax is due to expire next month.[Photo provided to China Daily]

Tax breaks on vehicles with low engine sizes will end by start of 2017, unless lobbying groups prevail

China's automotive industry might suffer in 2017 as the country's favorable policy on car purchase tax is due to expire next month, said industry insiders and analysts.

The policy was introduced in October 2015 to boost lackluster market performance. Currently, customers that buy cars with engines no larger than 1.6 liters are entitled to a 50 percent discount on the purchase tax, which usually stands at around 10 percent of a car's sticker price.

Shi Jianhua, deputy secretary-general at the China Association of Automobile Manufacturers, told the Changjiang Times newspaper that if the policy cannot be extended, the overall car market would see "a growth rate less than 2 percent or even negative growth in 2017".

CAAM statistics show that a total of 22 million cars were sold in the first 10 months of 2016, representing 13.8 percent growth year-on-year.

Of these, 19 million were passenger cars. Those with engines no larger than 1.6 liters totaled 13 million vehicles, accounting for 72 percent of passenger cars, which is 4.1 percentage points higher than in the same period last year.

Chen Shihua, the association's deputy general secretary, said such cars have accounted for 70 percent of passenger car sales "every single month" this year. "We can say that it has played a positive role in boosting the market's performance," he added.

Automakers have also voiced their concerns that sales will fall after the removal of the favorable policy, which has stimulated consumer demand.

Jochem Heizmann, president and CEO of Volkswagen Group China, said, "If the government really stays on their present decision that this (policy) will sharply end at the end of this year, you can expect a big negative impact in the first quarter next year."

Nigel Harris, president of Changan Ford Automobile Co Ltd, has similar concerns. He expects that in the first quarter of 2017, the market will see some slowdown. "We have been seeing a lot of sales activity in the fourth quarter this year because the policy is set to expire at the end of the year, and a lot of people are buying, taking advantage," he explained.

He said extending the policy would "make sense" as the automotive industry has been a big contributor to China's economy and employment.

In an earlier interview, Shi at the CAAM said the association will lobby to extend the policy. Various Chinese media have reported that the authorities are considering the suggestion, with some departments in favor of it and others having not yet expressed their viewpoints.

Li Weili, an official at the State Information Center, said at the China Automotive Dealers Association's annual conference earlier this month that the policy may be adjusted to give a 25 percent discount on the purchase tax, which would spur the auto market to grow by around 4.4 percent year-on-year.

But he added that the possibility of extending the policy as it was or removing the policy cannot be ruled out.

Credit ratings agency Fitch Ratings Inc expects that the Chinese authorities are likely to extend the tax break for another year, but clarified that "a late announcement, say in December, will probably reduce sales in the first quarter of 2017 more than if it came earlier".