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China to raise sales tax on small cars Jan. 1

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Washington Post Staff Writers
Tuesday, December 28, 2010; 9:46 PM

China will raise the sales tax on small cars Jan. 1, it was announced Tuesday, ending an economic stimulus that helped the country take the world lead in auto purchases and improved the fuel efficiency of the nation's fleet.

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The move follows by just days the announcement of a decision to sharply limit the number of cars allowed in Beijing, a city that has been ensnared in traffic jams.

Exactly how China handles its rapidly growing demand for automobiles and the pollution they cause is of keen interest to environmentalists and automakers across the globe.

Last year, for the first time, there were more cars sold in China than in the United States, and the magnitude of the nation's demand has made it a key point of reference in discussions of greenhouse gas emissions and world economics.

"Whatever happens in China's car market is impacting every automaker on the planet," said Karl Brauer, senior analyst and editor at large at Edmunds.com, an automotive Web site. "Every car company across the globe is looking at China, and if they aren't, they're not going to be in business long."

Combined, the end of the sales tax break and the Beijing limit on autos are expected to put downward pressure on sales in China. But automakers said they expect that the market will nonetheless continue to surge in the rapidly growing country.

"Both of those actions were anticipated, and we still expect to see continued strong demand and growth," said Greg Martin, a spokesman for GM, which has the largest presence in China among U.S. automakers.

China has become a critical market for the automaker, which is partially owned by the U.S. government.

The company expects GM sales in China to increase by 10 percent or more in 2011. This month, the company announced that Shanghai GM, a joint venture between the U.S. automaker and SAIC, had become the first passenger car manufacturer in China to sell 1 million vehicles in a single year. This year, it has sold about 500,000 Buicks, 490,000 Chevrolets and 16,000 Cadillacs, the company said.

Exactly how the new rules will affect automakers depends on the company, analysts said. For example, U.S. automakers may benefit from China removing the sales tax incentive for smaller cars relative to larger cars.

"That may bode well for U.S. automakers because they generally are better equipped to produce medium to large vehicles than smaller, fuel-efficient vehicles, though that is changing," Brauer said.

Last year, China cut in half the sales tax rate on vehicles with engines of 1.6 liters or less. The measure was viewed as a means of stimulating the economy and encouraging smaller, more fuel-efficient engines.

But China will restore the sales tax on small cars to the full 10 percent beginning with the new year, the Ministry of Finance said Tuesday.

The limit on new cars in Beijing arises from a new traffic plan for the city.

The plan involves miles of new underground highways, higher inner-city parking fees, a new bicycle-sharing plan, and, as its most controversial element, a limit of 240,000 license plates next year for the car-congested capital, or about a third of the new vehicles registered for 2010.

Beijing authorities defended their plan, saying Shanghai and Hong Kong have even stricter controls on the number of new vehicles allowed to be registered each year. Shanghai allows 10,000 and Hong Kong 1,000, Li Xiaosong, vice director of the Beijing Municipal Commission of Transport, said on the radio.

Automobile dealers reported that they were unable to sleep in recent days because of the surge in people buying new vehicles hoping to register in time to beat the end-of-year deadline. People lined up outside showrooms.

As of mid-December, Beijing had 4.76 million registered vehicles, an increase of 700,000 in 2010 over the previous year - and a growth rate Beijing traffic authorities said was unsustainable.



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