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    China Business
     May 18, 2006
China auto boom unfazed by new taxes
By Wu Zhong, China Editor

HONG KONG - Chinese consumers' desire to own a car appeared to grow even stronger last month as both sales and imports of passenger cars soared, seemingly unfazed by the government's new luxury taxes, which came into effect on April 1.

The booming automobile market since the beginning of this year may help ease the Chinese government's worry that what it deems excessive investment in the auto industry in recent years may eventually result in serious overproduction in upcoming years.

According to statistics just released by the General Administration of Customs, China's imports of motor vehicles in the first four months of this year doubled those in the same period of last year to reach 72,000 units. China imported 21,000 motor

vehicles in April, the first month of new taxes on luxury-car sales. Most imported cars are considered luxurious under Chinese regulations; hence the strong imports figure suggests consumers were not bothered by the levy.

This notion is further supported by better-than-expected sales of domestically made cars in April, and in the first four months of the year in general. April was the fourth consecutive month to witness strong growth of car sales in China, according to figures released by the semi-official Union of National Passenger Car Market Information. Chinese auto makers sold 373,000 passenger vehicles, including sedans, sport-utility vehicles (SUVs) and multi-purpose vehicles (MPVs - usually called minivans in North America) last month, up nearly 50% from a year before.

This was despite car buyers' having to pay newly introduced consumption taxes in the month. One purpose of the new taxation is to discourage people from buying large-engined cars, as Beijing is increasingly concerned with the country's growing demand for oil. The levy on cars with a 1,500-cubic-centimeter engine or smaller is 3%; it increases to 5% for cars with an engine between 1,500cc and 2,000cc, then jumps to between 9% and 20% for cars with bigger engines.

But the Union statistics showed that sales of low-priced compact cars, such as the popular QQ model made by Chery Automobile, grew more slowly than the rest of the market. For instance, sales of SUVs grew by 94.6% during the first four months of this year.

Thus the sales figures suggest the government's attempt to curb sales of luxurious cars has not been successful, as small-engine compacts seemed to continue losing market share to gas-guzzling SUVs and MPVs. Even soaring fuel prices do not appear to have scared off Chinese customers.

"Those who could afford [buying luxurious cars] still can afford [them] after the levy. Those who could not afford [them previously] still cannot afford [them] even without the levy," said Wang Yuanhong, an official with the Economic Forecast Department under the State Information Center, a think-tank of the National Development and Reform Commission (NDRC).

Continuous price cuts by Chinese auto makers helped to boost sales.

Beijing began to impose macroeconomic controls in early 2004 to curb excessive investment in certain industries. Under the belt-tightening policy, car sales began to slow down in late 2004, which prompted automotive manufacturers to cut prices to compete for market share. For instance, the price of Shanghai Volkswagen's Santana, its most popular model, dropped from 124,000 yuan (about US$15,500 at the current exchange rate) in 2001 to 76,000 yuan ($9,500) in 2005. As a result, car sales started to pick up in the latter half of last year.

Rao Da, general secretary of the Union of National Passenger Car Market Information, said, "We have achieved 18% year-on-year growth in the passenger-car sales for the first four months, beating the earlier forecast of 17% ... The buoyant sales of passenger cars reflect the change in people's consumption thinking in addition to the booming economy in China, where the car-owner population is still lower than [in] Western countries."

Rao said the sales figures for the first four months strongly indicate the auto market is taking an upturn, after bottoming out in the latter half of 2005, with total sales of motor vehicles for this year to well exceed 5 million units, according to the Guangzhou-based Nanfang Daily.

Union statistics showed sales of motor vehicles of all types hit a record 1.68 million units in China, up by 600,000, or 58.8%, compared with a year ago. Meanwhile, car output also jumped 51.5% to 1.75 million units for the first four months. Strong sales boosted auto makers' profits. According to the NDRC, the auto industry's profits in the first quarter of this year soared 87.4% from a year before to reach 15.3 billion yuan.

The strong sales figures for the first four months of this year may help ease Beijing's concern that China's automotive industry may begin to overproduce within the next few years. In March, the State Council, the country's cabinet, issued a circular warning of possible overinvestment in more than a dozen industries, including auto manufacturing.

The warning was based on earlier projections by the NDRC that as capital kept pouring in to invest in car manufacturing over the past several years, China's car-production capacity could reach 10 million units a year by 2010, while annual national demand would likely grow to just 8 million.

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More luxury cars imported in Q1 (May 5, '06)

Car imports fall in 2005 (Mar 22, '06)

Auto imports soar in Jan-Feb '06 (Mar 16, '06)

Car dealers in China face uncertain future (Mar 14, '06)


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