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China May Raise Small-Vehicle Tax, Promote Financing

China may raise the consumption tax on small cars next year as a reduced rate is no longer needed to boost sales, an official at the State Information Center said.

The government may restore a 10 percent tax rate on vehicles with engines no larger than 1.6 liters, Xu Changming, a research director at the center, said in an interview at a conference in Beijing today. China halved the rate to 5 percent in January 2009, helping the nation’s auto sales surge 46 percent to a record 13.6 million vehicles last year. It raised the tax to 7.5 percent this year.

Last year’s surge in demand isn’t sustainable in the long term and automakers are doing so well they no longer need the tax reduction to raise sales, Xu said. The government is also considering other subsidies that would target hybrids and electric cars, and may encourage automakers to expand lending to car buyers to increase sales, he said.

“It is most healthy for automakers to have an annual sales growth rate of about 10 percent,” Xu said. “It isn’t necessary to extend the tax reduction into next year. The government raised the tax to 7.5 percent this year to pave the way for returning the rate back to 10 percent.”

China’s vehicle sales may rise 17 percent this year to 16 million, and annual demand may eventually exceed 30 million, Xu said in a speech earlier today.

Overheating Risk

The government may introduce policies as early as this year to spur carmakers to set up auto-financing businesses, Xu said. The proportion of automobiles bought on credit in China is 10 percent, compared with 85 percent in the U.S. and 65 percent in India, he said.

One possible measure is allowing auto-financing companies to sell corporate bonds to raise capital, Xu said.

Even as the consumption tax may be raised, the auto-financing policies may contribute to a risk of too much growth, according to Paul Newton, a London-based auto analyst at IHS Global Insight.

“Growth momentum in the Chinese vehicle market is likely to accelerate further thanks to the easing of monetary policy by the local administration and impending new regulations supporting vehicle financing,” Newton said in a research note yesterday. “There is a fear that amid all of this investment and stellar growth, the vehicle market could start to overheat.”

The market may total 16.5 million vehicles this year and continue its current rate of increase “in the next few years,” Newton said.

China’s government is expected to announce subsidies for hybrid and electric cars as early as July. The details of the measures, which were originally scheduled to be announced in January, are still being debated, Xu said today.

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