CTI China Renaissance Report on Chinese Car Manufacturers Awaiting Tax Cut Extension News

LONDON, November 24, 2016 /PRNewswire/ --

A key tax break that has propped up auto sales in China is in the balance and carmakers in the communist nation are sweating over whether or not Beijing will extend the initiative to next year.

Should the central government decide to repeal the policy it could lead to the first time in history that China has seen a decline in annual car sales.

"China is the world's largest car market and we've seen stellar auto sales for many years," said IHS Markit Automotive head analyst James Chao. "There could be a very hard crash back down to Earth in the very near future though."

Sales tax for cars less than 1.7 litres was reduced to only 5 percent 12 months ago as Beijing was spurred into action by a significant downturn in growth for the world's second largest economy. The effects were instantaneous, turning around stagnant performance in the sector to one which achieved 14 percent growth.

Sector experts project that should the government decide to halt the take cuts, the car industry could suffer its first drop is sales since records began 20-years ago. Investment firm CTI China Renaissance said that sales would be flat at best without the policy, and capital inflow to the sector could be significantly reduced.

The tax break is due to run out at the end of the year and the fear that Beijing will choose to deny an extension has prompted prominent companies such as Volkswagen to potentially reduce their first quarter forecasts for 2017.

"We have been in talks with the central government and we are still not sure if they are serious about closing the tax policy in December," said Volkswagen China chief executive Jochem Heizmann."If they don't grant an extension then it will certainly mean a tough start to next year."

At the moment, observers are undecided on what Beijing's decision will be but most experts feel a small extension would only delay the inevitable downturn in sales. Analysts also say that a reinvigorated real estate market has taken the pressure off the economy and lessened the need for the authorities to boost the auto sector.

If the car industry did see a reduction in sales it could spur them into bringing in discounts for their most popular models in an effort to get back to the double-digit growth they are so used to.

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