China to Plan Rural Subsidies That Cover Passenger Cars

  • Subsidies would be first since previous program ended in 2010
  • China slashed a tax on smaller passenger vehicles in October

China plans to introduce a new round of subsidies for auto purchases by rural residents that will cover passenger vehicles with engines smaller than 1.6 liters, according to people familiar with the matter.

The planned subsidies will also cover mini-commercial vehicles and light pickup trucks, said the people, who asked not to be named discussing information that’s private. The incentives will be the first nationwide funding for rural buyers since a program ended in 2010, and differs from the previous round because it covers passenger vehicles, the people said.

China last introduced rural auto purchase subsidies in 2009 in the depths of the global financial crisis to help prop up economic growth. The spending helped propel the nation past the U.S. to become the largest market in the world for new vehicle sales. The new incentives would come after the government slashed a purchase tax on small passenger vehicles in October after lobbying by automakers concerned about a sharp slowdown in sales.

“The auto sector has a very long industry supply chain and can directly stimulate economic growth,” said Xu Gang, a managing director at Boston Consulting Group in Shanghai. “There’s not much room to stimulate sales in big cities as vehicle ownership is approaching saturation levels.”

China is spending to protect its auto industry, which employed about 3.5 million people as of the end of 2014 and is a major contributor to tax revenue, even though a surge in vehicle ownership in the past decade has resulted in worsening gridlock and air quality in its cities.

The tax cut in October, which lowered a purchase levy on passenger vehicles with 1.6-liter engines or smaller from 10 percent to 5 percent, helped lift industrywide demand by 18 percent last month, with SUVs and minivans leading the surge.

“There has been a shift away from minibuses to domestic SUVs and MPVs which a new subsidy would likely underpin,” said Janet Lewis, a Hong Kong-based analyst at Macquarie Group Ltd. “It would likely benefit domestic automakers more than international brands.”

Shares of Chinese automakers surged, led by Geely Automobile Holdings Ltd., which gained as much as 9 percent in Hong Kong trading. Chongqing Changan Automobile Co. and BYD Co. both advanced more than 5 percent in intraday trading as of 3:31 p.m. The benchmark Hang Seng Index slid 0.3 percent.

The National Development and Reform Commission and Ministry of Commerce didn’t immediately respond to faxed requests for comment.

— With assistance by Tian Ying, and Steven Yang

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