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Purchase tax policy likely to continue in 2017, but with a twist

The purchase tax policy on 1.6L and below passenger vehicles that was instituted in October 2015 and due to expire by yearend has been a major driver of the auto market over the past year.

In October and over the first 10 months of this year, those vehicles accounted for well over 70 percent of the passenger vehicles sold, thanks to the policy that allows consumers who buy those vehicles pay only half the 10 percent purchase tax normally charged.

Will the tax savings continue next year or not? That is the burning question different industry stakeholders have been pondering for some time as the year draws to a close and there is still no official word from the State Council, which announced the policy at the end of September 2015.

The longer the suspense is, the more “gushing” the market will be as consumers rush to purchase vehicles to enjoy the tax savings in case it does not continue in 2017. This pre-buy effect has gotten stronger into October and November, and judging by preliminary November sales numbers that have been announced by manufacturers, November will follow October as another “silver” month with record sales.

But the longer the suspense is, the more anxious OEMs and dealers will be as their future planning for the New Year is highly dictated by whether the policy will continue or not and the timing of that announcement is critical.

It has become such an important issue that several ministries and commissions including the National Development and Reform Commission (NDRC), Ministry of Transport and Ministry of Finance organized an emergency meeting on November 1 to discuss the issue, according to media reports. Only one out of those ministries and commissions was clearly against the policy continuing for another year while the rest either suggested it continue or had no comments, according to people familiar with the matter. Some suggestions also included alternative policies such as another round of “automobiles to the countryside” or “cash for clunkers.” China Association of Automobile Manufacturers (CAAM), the semi-government organ that publishes monthly auto production and sales data, has even submitted a proposal to the relevant departments urging them to continue the policy.

Signs seem to be pointing in the direction that the policy could very well continue next year, or at least it has become an urgent issue that discussions are being held to consider extending it. The reason again is obvious: no industry affects the economy as much as the auto industry, because it directly or indirectly affects so many other industries and the government needs to think thoroughly about the consequences the discontinuation of the policy will have on the economy, which is trying pretty hard to stay above the 6.5 percent GDP growth level.

CBU/CAR believes what may likely happen is that the policy will continue for another year, but at a lesser “discount” – 7.5 percent, or a quarter off the normal 10 percent rate instead of half off.  Several senior OEM executives have also told CBU/CAR of this possibility in recent corporate visits and that could be the solution that makes everyone happy.

But nevertheless, with or without the tax savings next year, the market is unlikely to grow higher than 5 percent with already a huge base of more than 27 million units in sales expected in 2016.

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