BEIJING — The Chinese government and 36 automakers operating in the country have joined hands to revive anemic vehicle sales by offering tax breaks and discounts.
New-vehicle sales sank 12.6% on the year in May, the China Association of Automobile Manufacturers reported Friday, the third straight month of double-digit declines. But one silver lining was that the margin of decrease improved from the 47.6% plunge in April.
“Thanks to joint efforts, the auto sector will likely make an early return to a normal trajectory,” said Chen Shihua, CAAM’s deputy secretary-general.
Chen’s “joint efforts” refer to the initiative to promote auto sales, pushed by government and the industry. Sales in China totaled 26.27 million passenger and commercial vehicles last year, and the entire automotive sector accounts for an estimated 10% of the gross domestic product.
The central government made the first move. The State Council, China’s cabinet, is enacting 60 billion yuan ($8.97 billion) worth of tax cuts between June and December. The purchase tax on certain passenger vehicles will be reduced by half.
The tax cuts target cars with 2-liter engines or smaller, priced at 300,000 yuan or less. A wide range of models will benefit, including those by foreign automakers.
In addition, 21 provinces and provincial-level cities will grant maximum rebates of roughly 20,000 yuan to those who trade in for new vehicles. Guangdong Province will grant 10,000 yuan to those who trade in old vehicles and buy new autos that use alternative energy sources — known as new-energy vehicles — according to Chinese media. The subsidy will be 5,000 yuan for a new gasoline vehicle.
Cities also will relax limits on the issuance of license plates. Guangzhou will issue 30,000 additional plates through the end of June, and Shenzhen will make 20,000 more plates available through the end of 2022.
Shanghai will give a 10,000-yuan subsidy for each purchase of select electric vehicles. Changchun city is granting vouchers of up to 7,000 yuan for those who buy new vehicles. Shandong and Henan provinces have announced plans to prop up car sales as well.
Automakers responded by discounting sticker prices or otherwise lowering the amount paid by consumers. The 36 major auto manufacturers, including those from overseas, have embarked on sales promotion campaigns, Chinese media report.
Two joint ventures — one between Volkswagen and China FAW Group, and the other linking Hyundai Motor and Beijing Automotive Group — have offered pay some or all of the purchase taxes left over from the state tax relief.
Other Chinese automakers have jumped on that bandwagon. Great Wall Motor will pay the purchase taxes on sport utility vehicles. Chongqing Changan Automobile will defray the entire purchase tax on its Oshan line of vehicles, and knock off up to 20,000 yuan more. SAIC Motor will discount vehicles under its own brand by 125% of the purchase tax.
The China Passenger Car Association predicted in mid-May that sales will drop 5% this year to 19 million units. But after seeing the flurry of incentives, the group upgraded the outlook to 21 million passenger vehicles.
China’s car purchases have tumbled due to the fallout from the country’s “zero COVID” policy. Officials locked down Shanghai and placed tough restrictions on Beijing following coronavirus outbreaks. Those measures forced dealerships and auto plants to suspend operations.
“If relevant companies in Shanghai and surrounding areas don’t find a way to restart production in plants, all Chinese automotive plants might halt production in May,” He Xiaopeng, CEO of Chinese automaker Xpeng, wrote on the Weibo social media platform in April. The CEO’s warnings turned out to be prophetic for Shanghai and some other cities.
The lifting of Shanghai’s lockdown is expected to breathe new life into China’s auto industry. But problems remain.
The discounts might cannibalize future sales. This phenomenon happened in China after the tax cut on small vehicles expired at the end of 2017. Sales slumped the following year, and the government responded by reinstating the subsidies in 2019.