China to Raise Tax on Smaller Cars to 7.5% Through 2017: Sources

  • Tax was halved to 5% from 10% in October 2015 to spur demand
  • Sales growth may moderate to 3% in 2017 from 15% this year

Vehicles move along a road in Shanghai, China.

Photographer: Tomohiro Ohsumi/Bloomberg

China will raise the sales tax on small cars to 7.5 percent, curbing an incentive that has propped up the auto industry, which is heading for its 26th consecutive annual expansion, according to people familiar with the matter.

The tax rate is less than the 10 percent originally scheduled to take effect from January. However, it is an increase from the 5 percent rate introduced in October 2015. Shares of carmakers fell.

“This is worse than the market’s expectation of keeping the tax at 5 percent, so some people are disappointed,” Ka Leong Lo, a Hong Kong-based analyst at Kim Eng Securities Ltd., said by phone. “Some others simply use this as an excuse to reduce their exposure in the auto sector because they have made profits this year on auto stocks.”

BAIC Motor Corp. and Geely Automobile Holdings Ltd. each declined more than 4 percent as of 3:25 p.m., while Guangzhou Automobile Group Co. dropped as much as 3.2 percent. Great Wall Motor Co., China’s largest SUV maker, fell as much as 2.5 percent.

China’s government halved the levy on purchases of vehicles with engines up to 1.6 liters last year after lobbying from the nation’s auto association as demand waned along with the economy. Auto sales promptly rebounded and surpassed last year’s tally in November, clinching a 26th consecutive annual gain.

Economic Linchpin

Carmakers had lobbied for the lower levy to be made permanent, citing concerns sales would slump next year after consumers brought forth their purchases. The government cited the industry’s status as a linchpin of the world’s second-biggest economy when introducing the incentive last year.

Consumers bought 21.1 million passenger vehicles in the first 11 months of the year, more than the 20.6 million units purchased in all of 2015, according to the China Passenger Car Association. The last time China’s car market shrank was 1990.

Sales growth may moderate to 3 percent in 2017, from about 15 percent this year, Lo said in an e-mailed report.

Geely posted the fastest sales growth among major local automakers with its deliveries almost doubling to 102,422 units in November, while Guangzhou Auto and Great Wall recorded sales increases of more than 30 percent last month.

— With assistance by Ying Tian, and Steven Yang

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