SHANGHAI (AdAgeChina.com) -- For the rebound of China's auto market in this year's first five months, we can mostly thank the government's 50% cut in taxes on the purchase of smaller vehicles.
Some automakers now fear the policy's market-stimulating effect will taper off and are lobbying the government to expand the tax cuts.
The government should not listen to them. The domestic economy has improved, so it is time to reduce government intervention and let the market decide what is needed and who can survive amid competition.
When the development of an industry is disrupted due to external shocks, government stimuli are needed to put it back on track. The global downturn hit China's car market hard in the final quarter of last year.
Total unit sales dropped by 8% year-on-year in the period, after growing at an annual rate of more than 10% for a decade.
The tax cut in January was a timely measure. Passenger vehicle sales regained growth; rising 15% in the first five months of 2009, compared to the same period a year earlier, to 3,000,580 units, according to Automotive Resources Asia (ARA), a unit of J.D. Power.
But the tax incentive will harm the long-term development of the domestic auto industry. One effect has been a propping up of the weakest players in China's car market. This has slowed down much-needed consolidation in a highly-fragmented industry.
A second negative result of the tax incentive is excess capacity in the micro car segment. Attracted by the incentive policy for small cars, a slew of automakers including Chongqing Lifan Industry Co. and FAW Haima Automobile Co. have started making micro cars.
China now has 10 micro car makers with a total annual capacity approaching 2.3 million units. Some of them are still building factories. Even with the tax incentive, total micro car sales in China were only 208,337 units in the first five months, according to ARA figures. This means substantial overcapacity already exists in the micro car segment.
To apply a similar tax cut to vehicles with engine size of between 1.6 and 2.0 liters, as some automakers are now appealing for, would fuel a similar excess capacity higher up in the market. That is why the government should avoid enacting fresh incentives to further spur auto sales. Such measures distort demand and lead to excess supply.
The Chinese economy shows signs of recovery. Value-added industrial output in May grew by 8.9% year-on-year. Domestic stock and property markets are up. The Chinese government is confident of achieving an 8% national GDP growth this year.
With a rebounding economy, demand for larger cars is sure to increase. Instead of pump-priming a recovering market, the government should think further down the line. It should focus on promoting fuel efficiency, and toughening emission and safety standards.
These issues are essential to the sustainable development of the domestic auto industry. They also have to be tackled if China is serious about exporting to America and Europe. The market alone cannot solve them. Like falling demand in the recent past, thesea are issues that have to be tackled by the government.
Yang Jian is the managing editor of Automotive News China, which first published this Viewpoint article.
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