HONG KONG (MarketWatch) — Chinese automobile stocks were mixed Wednesday after the government announced it will allow a tax incentive on small-car purchases to lapse by the end of the week, marking the latest move by China to ease the growth in vehicle use.
The Ministry of Finance Tuesday said that a tax on purchase of cars with engine capacity of 1.6 liters or less will be restored at 10% from Jan. 1 from 7.5% at present. The government had in January 2009 halved the tax to 5% to stimulate car purchases in the wake of the global financial crisis, before increasing the rate to 7.5% from the beginning of this year.
The looming expiry of the incentive, which had been well anticipated by prospective car buyers on the mainland, has boosted automobile sales in recent months as consumers brought forward their planned purchases. But sales next year could be a different story.
"Depending on the magnitude of pre-buying ahead of [the tax incentive] expiration at the end of 2010, small-engine-size passenger vehicle demand could be weaker than expected” in the first half of 2011, Citigroup analyst Gerwin Ho wrote in a note to clients.
Data released earlier this month showed that China’s passenger vehicle sales surged by more than 29% in November from the year-earlier month, to a record 1.34 million units. In the 11 months to November, sales were up almost 35% to 12.45 million vehicles.
Citigroup’s Ho, along with several other analysts, noted that a tax subsidy currently offered on purchase of a small cars will remain in force next year, and will continue to draw customers toward more fuel-efficient vehicles.
China currently offers a 3,000 yuan ($451) subsidy on vehicles with engines of 1.6 liters or smaller.
BofA Merrill Lynch analysts Bin Wang and Edmond Huang said the product mix should favor smaller and fuel-efficient cars in 2011, as the subsidy — which accounts for about 5% of a small car’s selling price — should outweigh the impact from the removal of the tax incentive.
"Currently around 60% of small cars are eligible for this subsidy, and more models will come with auto makers’ effort to update their vehicles/engines. Specifically, cheaper and smaller cars should benefit more, given the 3,000-yuan subsidies holding a bigger proportion in their [average selling prices],” the analysts said.
In Wednesday’s trading, shares of many automobile companies either declined or rose less than the broad market, while some rebounded after recent steep losses.
SAIC Motor Corp. slipped 0.1% in Shanghai, with Geely Automobile Holdings Ltd. falling 0.9%, and Great Wall Motor Co. little changed in Hong Kong. Ranking among the gainers, shares of electric-car maker BYD Co. added 1.3%, and Brilliance China Automotive Holdings gained 2.8%, paring some of their recent losses.
Most shares had tumbled recently after the Beijing municipal government said it will set a lower quota of 240,000 new vehicle license plates in 2011 in a bid to ease traffic congestion in the city, sparking worries that other Chinese cities may also follow suit.
Beijing’s new license-plate quota compares with estimated sales of 750,000 vehicles this year in the capital city, according to a report in The Wall Street Journal.
The broader markets were already under pressure lately amid fears that, after raising interest rates twice so far this year, the People’s Bank of China may hike even more aggressively in 2011.
In midday trading, the Shanghai Composite was up 0.1% at 2,735.82, and Hong Kong’s Hang Seng Index added 1.2% to 22,886.09.
Elsewhere in the region, Japan’s Nikkei Stock Average added 0.3%, Australia’s S&P/ASX 200 slipped 0.2%, South Korea’s Kospi climbed 0.3% and India’s Sensex advanced 0.4%.
