China cuts tax on smaller cars to help economy

Sales tax cut amid various positive signs for the Chinese economy

Sitting in the cinema before the latest instalment of the Mission Impossible franchise last week, we were forced to sit through a lengthy series of advertisements for smaller cars, evidence of a broader push on sales to keep the car industry performing well in the world's second-largest economy.

Just to make sure, the government has halved sales tax on small cars in a bid to revive flagging economic growth. The cut in sales tax on cars with less than 1.6-litre engines took effect on National Day last week, October 1st, and the reduction lasts through the end of next year.

Cars in this segment account for nearly 70 per cent of total sales in China.

After weeks of bad news, it will perhaps offer a glimmer of light for German carmaker Volkswagen in China.

Luxury car sales have been hit by president Xi Jinping’s crackdown on corruption and party officials’ lavish lifestyles, but keeping the market for smaller cars is crucial for overall growth.

VW, which makes half its profits in China, has five of the 10 best-selling models in the smaller model category, although it has watched sales fall this year. Unsurprisingly, shares in the major Chinese carmakers were boosted by the news.

Analysts do not expect a massive turnaround in what is already a heavily discounted car market, but it would definitely give a lift to sales.

Car sales in China, the world’s biggest market since 2009, were flat in the first eight months of the year and could contract this year for the first time since the market took off in the late 1990s.

The Chinese government has been pulling out all the stops to try to keep economic expansion on track within the context of what the government calls the “new normal” of more moderate economic growth.

Last week marked the 66th anniversary of the founding of the People's Republic of China, and at a reception in the Great Hall of the People, premier Li Keqiang said he was confident China would meet its goals on economic growth for the current year. Positive direction Mr Li said China had adopted various range-based macro-regulation to ensure China's economy continued to move in a positive direction despite some ups and downs.

“The economy still operates within a reasonable range, with the quality of development further improved and systemic risks effectively checked,” Mr Li said.

The premier said as the world’s second-biggest economy, it is not easy for China to maintain a growth rate of about 7 per cent on the $10 trillion (€9 trillion) gross domestic product baseline, and it would be even more challenging to build a brighter future from the new starting point.

“Facing opportunities and challenges, we must bear in mind our mission and the great trust people have placed on us, meet people’s expectations in our work of governance, and continue to push forward reform, opening-up and socialist modernisation drive,” Mr Li said.

According to the Westpac MNI China Consumer Sentiment Indicator, consumer sentiment in China improved last month to its highest reading since May 2014. Indifference The index climbed to 118.2 in September from 116.5 in August, showing a certain indifference to stock market turbulence during the period.

“Much like the reaction to the July stock shakeout, the majority of consumers barely batted an eyelid. This is maybe not so surprising given that only around 11 per cent of our urban dwelling respondents identify themselves as actually being invested in the market,” Westpac MNI said in a report.

“The market is unlikely to be viewed as a bellwether for economic prospects either – the spectacular market surge in the year prior to the rout coincided with a continued weak growth for China by historical standards,” it said.