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China to prolong stimulus policies while ending purchase tax reduction this year

China is to continue its stimulus package program to encourage vehicle consumption especially in rural areas, while ending the incentives to cut the vehicle purchase tax by half till the end of this year, according to a Xinhua news report.  

At a news conference on August 13 in Beijing, Li Yizhong, head of the Ministry of Industry and Information Technology (MIIT) said that China’s auto industry has witnessed a rebound with rapid growth this year. For five months from March to July, China’s monthly auto production and sales have exceeded 1 million units, reaching 1.1 million in July, said the report.  

“The overall industry performance is heading in a good direction and the economy is turning better,” Li said. The fast recovery of China’s auto industry is thanks to the series of stimulus policies including the “replacement of clunkers with new vehicles”, “vehicle sales going to the countryside,” and the reduction of the purchase tax on economy vehicles.  

“China’s subsidy policy to encourage rural residents to replace their old cars with new ones should continue so as to support the auto industry,” said the Minister. “But we have’t decided whether to extend the policy of tax cut on vehicle purchase, which will expire on December 31 this year.”  

China has reduced half of the purchase tax on passenger vehicles with engine displacement of 1.6 liters and less from 10 to 5 percent since January 2009. It was a big step when the government decided to grant ¥12 billion ($1.77 billion) in support of the program, which has proved successful. In the first six months of this year, China sold 3.15 million vehicles with engine displacements of 1.6 liters and less, up 45 percent year-on-year. 

Earlier an unnamed official with the National Development and Reform Commission (NDRC) told the media that they would make some adjustments in related guiding principles when the sales tax cut policy expires by the end of this year.   

Nowadays, there has been huge potential demand for automobile consumption in rural areas. Farmers are encouraged to replace their old farm vehicles with new light trucks with considerable government subsidies. More and more new energy cars are being developed to meet China’s energy saving and emission control goals.  

With around 6 million vehicles sold in the first half, China is expected to produce and sell approximately 11 million units in 2009, about 8 percent growth in the automotive industry, based on NDRC’s prediction.

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