SHANGHAI – The Shanghai city government announced on June 1 the lifting of a two-month lockdown. The same day, Beijing halved the sales tax to 5 percent on new cars with engine sizes of up to 2.0 liters and sold for 300,000 yuan ($45,045) or less.
Both moves are designed to restore business and household activity and create some momentum for the slowing Chinese economy.
But the reality is as long as the central government upholds its zero-tolerance policy to contain the coronavirus, vehicle sales in China will remain subdued.
To be sure, sales of new light vehicles are bottoming out industrywide after automakers and parts suppliers in Shanghai, China’s financial center and auto production hub, were allowed to adopt “closed-loop” operations whereby employees sleep in factories or designated hotels starting in mid-April.
Retail sales of new sedans, crossovers, SUVs, multi-purpose vehicles and minibuses across the country dropped 19 percent to some 1.32 million in May, after plunging 36 percent in April, according to estimates from the China Automobile Dealers Association.
Vehicle output and shipment will continue to recover in Shanghai now that the city has come out of lockdown. But only to some extent.
To prevent another wave of virus infections, the Shanghai government now requires all residents to demonstrate negative results of a nucleic acid test within 72 hours of returning to work or taking public transport.
Given the time needed to undergo testing and waiting for results, local residents have to get tested every other day, creating the long queues that have become a common scene in front of hospitals or make-shift testing sites throughout in the city.
Other Chinese cities remain on high alert. To contain the virus, some cities are subjecting travelers from Shanghai to the same quarantine rules as they do visitors from overseas – a seven-day hotel quarantine followed by another seven days in home isolation.
Such travel restrictions have made it hard for automakers and suppliers to conduct businesses with peers elsewhere in China.
Never mind what residents and businesses are experiencing in Shanghai. The Chinese new-vehicle market seems poised for a jumpstart thanks to the slash in vehicle sales taxes.
The tax cut, in effect the rest of the year, will boost annual sales of new light vehicles in China by two million in 2022, the China Association of Automobile Manufacturers predicted this week.
But what happened in the Chinese car market in the past demonstrates a tax-cut comes at a cost to future market growth.
Once the incentives end, demand will tank because a large number of shoppers made a purchase ahead of plans.
Beijing cut sales taxes on new-vehicle purchases twice in the past. The most recent one took place on September 30, 2015, when levies were also halved to 5 percent on light vehicles with engine displacements up to 1.6 liters.
China’s light-vehicle market immediately expanded 15 percent from a year earlier in 2016. But market growth slowed to one percent the next year after the tax cut was phased out.
The performance of the car market ultimately depends on how the national economy fares.
Beijing’s zero-COVID policy has stymied economic activity well beyond the auto industry so far this year, making it nearly impossible for the national economy to achieve the government’s preset growth target of 5.5 percent.
In recent weeks, the central government has repeatedly said it will keep the policy unchanged.
Under such a policy, the Chinese car market is bound to suffer though it may take some time for results to manifest because of the tax incentive.
