China to end auto tax incentives, to pressure shares

BEIJING (Reuters) - China will end tax incentives for small cars on January 1, the finance ministry said on Tuesday, a long-anticipated step that would apply the brakes to the runaway expansion of the world’s largest auto market.

The scrapping of the incentives will affect sales of small cars, which comprise about 60 percent of passenger car sales in China, but will not dampen auto demand in a country where per capita car ownership remains low compared with mature markets.

The move, though expected will still likely hit Chinese auto stocks, such as FAW Xiali, Chongqing Changan Auto, which fell after Beijing’s city government imposed quotas on new car registrations last week.

“Everyone is actually expecting the government to scrap the incentives. Many people that previously had no plan to buy cars this year changed their mind,” said John Zeng, an analyst with J.D. Power Asia Pacific.

“Why hold on to the money for a couple of months and end up paying more? It will save you a few thousands of yuan if you buy a Chevrolet Sail with the incentives,” he said, referring to General Motors top-selling model in China.

With effect from Jan 1, a sales tax of 10 percent will be imposed on cars with a 1.6 liter engine or smaller, the finance ministry said on its website (www.mofcom.gov.cn).

It did not say whether a 3,000 yuan ($450) rebate for fuel-efficient cars would be remain in place along with subsidies for farmers who exchange used vehicles for new ones.

Many dealers have already sold out, with customers having to wait months to get their car due to the year-end spending frenzy, auto dealers told Reuters.

As such, monthly car sales might fall year-on-year in the first few months of next year, industry insiders said.

For the full year, the market will continue to grow at a more subdued, stable pace due largely to demand in inland areas replacing big, coastal cities as major growth areas for the auto industry.

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China’s auto industry grew 53 percent in 2009 and 35 percent in the first 11 months of 2010.

In the first 11 months, SAIC, a long-time partner of GM, sold 3.29 million vehicles, up 35 percent. It will aim to sell 4 million vehicles next year, its president, Chen Hong, said.

Richard Baker, deputy general manager of the sales arm of Ford Motor China car venture, said the impact from the removal of the tax incentives would not be long lasting.

Terry Johnsson, vice president for GM’s China operations, concurred, saying he expected China’s auto market to grow 10-15 percent next year even if auto incentives were “rolled back to zero.