Tax cuts, other incentives lure potential buyers back to showrooms

The vehicle market in China was badly hit in April, with sales falling by nearly 50 percent year-on-year to 1.2 million units due to factory stoppages and significantly reduced showroom trade caused by COVID-19 outbreaks.

The sharp fall led to fears that the world's largest vehicle market since 2009 might shrink this year, but such sentiment has been dispelled by rosy prospects for production and purchases after the worst April in a decade for the industry.

More than 1.86 million vehicles were sold last month, according to the China Association of Automobile Manufacturers－a 12.6 percent fall from the same month last year, but a 57.6 percent rise on the figure for April.

The association's statistics were provided by domestic and international carmakers with operations in China, who are stepping up production and whose dealers are starting to see an influx of showroom visitors as the COVID-19 outbreaks are brought under control.

Analysts at Soochow Securities expect the rising trend in production and sales to accelerate in coming months.

"The growth rate will average more than 20 percent year-on-year from June to the end of the year," the analysts predicted in a research note.

Their estimate is based on efforts to bring COVID-19 under control, and more important, the series of measures introduced by governments, including halved vehicle purchase tax, the issuance of additional license plates, and the "going to the countryside" campaign for new energy vehicles.

On June 1, purchase tax, which was typically 10 percent of a vehicle's retail price, was reduced to 5 percent for cars costing a maximum of 300,000 yuan ($45,000) and having 2-liter or smaller engines, according to the Ministry of Finance. The tax cut is in effect until the end of this year.

Wang Chen, a 30-year-old information technology engineer in Tianjin, said the tax reduction made him think seriously about buying a Volkswagen Lavida.

"To be frank, I can either purchase the vehicle now or later, because I don't need it that urgently, but the tax cut can save me about 7,000 yuan, which is almost my monthly salary," Wang said.

According to a plan announced last month by the State Council, China's Cabinet, vehicle purchase tax cuts nationwide will total 60 billion yuan by the end of this year.

According to an estimate by Ping An Securities, the tax reductions will account for 17 percent of vehicle purchase taxes levied last year.

In 2009 and 2015, China introduced measures to halve the purchase tax on passenger vehicles with engines no bigger than 1.6 liters. On both occasions, the tax reductions revitalized the car market.

This year, more vehicles are subject to the reductions. According to data from Huafu Securities, more than 90 percent of gasoline-powered car models are eligible for the tax cut, compared with some 65 percent in past years. This means that most popular brands, including Volkswagen, Toyota, Geely and Great Wall Motors, are benefiting from the favorable tax policy.

Cui Dongshu, secretary-general of the China Passenger Car Association, described the tax reduction as "a super big bonus" for the auto industry.

In April, the association estimated that passenger vehicle sales nationwide would struggle to total 19 million this year. "Thanks to the new policy, we now expect retail sales to reach 21 million this year, up by 4 percent from 2021," Cui said.