- Levy on autos with engines 1.6 liters or less cut to 5 percent
- Auto association lobbied for stimulus as vehicle sales slowed
Chinese automaker stocks soared after the central government cut a tax on passenger-vehicle purchases and said it will support the adoption of electric vehicles following a slump in industrywide sales.
Geely Automobile Holdings Ltd. jumped 16 percent in Hong Kong, the biggest gain in six years. Great Wall Motor Co., China’s biggest maker of sport utility vehicles, surged 20 percent. Dongfeng Motor Group Co., which has a joint venture with Nissan Motor Co., climbed 15 percent while BYD Co., the biggest maker of electric vehicles, rose 6.8 percent.
The support measures follow lobbying by China’s state-backed auto association for stimulus measures to bolster the industry after vehicle sales fell for a fifth straight month amid a stock-market rout. The intervention suggests the auto industry is “too big to fail,” as it contributes more than 10 percent of China’s gross domestic product, tax income and employment, according to Sanford C. Bernstein & Co.
The announcement “demonstrates Beijing’s resolve when it comes to maintaining growth in the auto industry, ” Bernstein analysts led by Robin Zhu wrote in the report. “Higher volume growth means near term earnings estimates go up, and helps alleviate some of the scarier scenarios around overcapacity.”
China cut the purchase tax on vehicles with engines 1.6 liters or smaller by half to 5 percent effective Oct. 1 through the end of next year, according to the State Council, or cabinet. The directive also forbade local governments from restricting the purchase and operation of electric vehicles and reiterated support for promoting new-energy vehicles and battery development. The statement also highlighted car-sharing and short-term rentals as modes of transportation.
China unleashed stimulus measures in the midst of the global financial crisis, when car-buying subsidies helped push the country past the U.S. in annual sales in 2009.
U.S. consumers bought more passenger vehicles than their Chinese counterparts for the first time in almost six years in July, according to sales data compiled by Bloomberg from Ward’s Automotive Group in the U.S. and China Automotive Information Net.
Credit Suisse Group AG estimated that the tax cut will boost passenger-vehicle sales by about 3 million units a year and raised its rating on China’s auto industry to overweight. It also upgraded Dongfeng Motor, SAIC Motor Corp. and Great Wall to outperform, from neutral.
In the first eight months of this year, 68 percent of cars sold in China had engines smaller than 1.6 liters, according to Bank of America-Merrill Lynch. Great Wall’s H6, the most popular SUV in China, comes in a 1.5-liter version.
The government measures are “indicative of the sentiment that the market is very weak and deteriorating, in line with general perceptions about the economy in China,” said Peter Wells, co-director of the Centre for Automotive Industry Research at Cardiff University. “There is a concern that consumer caution may start to dampen further market growth.”
— With assistance by Tian Ying