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Will China’s stimulus policies backfire?

No doubt the auto production and sales in China will continue to gather momentum through the year with strong policy support nationwide. But one may ask if such stimulus policies would backfire on domestic auto market if stimulus policies went off next year.

Possible adjustments should be made to improve risk control while maintaining policy coherence at the same time, according to veteran expert Rao Da, secretary-general of China Passenger Car Association.


Robust sales on domestic auto market

China’s automobile production hit 10 million units on October 20, 2009 when a great celebration was held in FAW’s headquarters in Changchun, capital of Jilin Province in Northeast of China.

Therefore, the total output and sales throughout the year is expected to go beyond 12 million units, says China Association of Automobile Manufacturers (CAAM).

Statistics show that domestic car production and sales in September reached 1.362 million and 1.332 million units respectively, up 19.41 percent and 16.98 percent over August, or an increase of 78.85 and 77.88 percent compared with last year. It is the 7th month in a row to hit record high of over 1 million units each month this year.

The automobile output and sales from January to September were about 9.613 million and 9.663 million units, an increase of 32 and 34 percent, respectively, over the same period of 2008.

China’s booming auto market this year is largely due to a series of favorable policies adopted at the beginning of the year, such as vehicle purchase tax cut by half, cars to the countryside, and trade-in old cars with new ones, etc. The tax reduction for 1.6L and less displacement cars is believed most effective.

In the first nine months, the total sales of 1.6L displacement cars amounted to 5.061 million units, rising 60.43 percent over last year and reaching a record high to account for 69.89 percent of the market share.

In many cities including Hangzhou, Qingdao, Foshan and Shenyang, the vehicle inventory, particularly the mid-end cars, had been running low frequently, a scene in sharp contrast to the situation last year.

Judging from the rapid growing car market in China, some major automakers have tried one way and another to expand their capacity for more production in the years to come.

The basic auto consumption demand will continue in 2010, especially due to the government’s effort to keep auto growth rate by 10 percent for thee years on average.

But there is the danger that overcapacity may hit a peak by 2011 or 2013, according to analysts.


Double nature of stimulus policies

China’s auto market shrank in the second half of 2008 with a drop of imports and reduction in output by domestic carmakers.

However, things began to change in mid-December last year when China announced a package program to stimulate the national economy.

As the domestic demand kept rising this year, a monthly increment of 150,000 units was added on average, reaching peak of 1.362 million vehicles in production in September.

The present recovery of the China market has reached a high growing rate of 120 percent under favorable policies. Consequently it may have created some risks for the future.

“Alternative policies should be developed as soon as possible before the interim policies are withdrawn,” said Rao Da. “Or it will be hard to fulfill the revitalization plan, causing more international conflicts and troubles.”

People are wondering what effective measures will come about to ensure the market growth next year. The reduction in half of the purchase tax for 1.6L displacement and smaller vehicles is supposed to discontinue by the end of this year.

“The domestic auto consumption demand would fall down next year if the policy stopped at yearend,” predicted Zhao Hang, director of China Automotive Technology and Research Center (CATARC).

“This policy should be continued,” said Dong Yang, secretary-general of CAAM.

“Favorable policies will continue to support the automobile industry,” said Li Yizhong, Minister of Industry and Information Technology, earlier. Analysts predict that the government will formulate measures to promote fuel-efficient and environment-friendly vehicles.

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