According to the officious, English-language China Daily, “Chinese automakers are facing their toughest challenge in three years as demand is falling and profitability is plunging amid rising costs.” And that’s because “China’s car sales rose 11 percent in the first nine months, compared with a 22 percent increase for the whole of last year.” So, even before the U.S. of A. can open the federal bra on behalf of Detroit’s automakers, the Chinese government has swung into action. “China’s government is discussing policies to help automakers boost sales and fend off the global financial crisis.” Policies being considered in Beijing include… “Consumption-tax breaks” – The PRC plans to give the little guy a break and money in his hand, instead of giving billions to three (or maybe just two) big guys. “Subsidies to automakers that develop vehicles powered by alternative energies” – that has a familiar ring to it. Because alternative energies are still mostly a gleam in the eye of a few believers, the real plan consists a hefty tax break with a green top coat finish. Chinese consumption tax (nothing to do with TB) can be as low as one percent for a (non-)car with a displacement of less than a liter, and as high as 40 percent for a bigger-bore vehicle of more than four liters. China Daily’s source is Chen Jianguo, himself “deputy head of the industrial coordination department of the National Development and Reform Commission.” If China Daily quotes a guy with a title that long, you can consider the plan as good as done.
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I’m confused…
Well, the upshot is that the Chinese government is concerned about the health of their car industry. They are concerned because the growth rates aren’t what they used to be. So they are doing something. They react much earlier than other governments that convene cattle-control committees after the cow is long out of the barn.
Note: In September, when oil was still going up, China had raised consumption tax on automobiles with engine capacities of 3.0-4.0 liters from 15 to 25percent. Tax for vehicles with engine capacities above 4.0 liters was raised from 20 to 40 percent.
The tax on automobiles with engine capacities below 1.0 liter was reduced from 3 to 1 percent.
This environmentally and especially fiscally sound move remained largely unnoticed by the world. Imagine if the sales tax in America on everything above 244 CID would suddenly double to 40percent. The next day, Washington DC would be razed.
The move was aimed to encourage the sales of energy-efficient cars amid the skyrocketing oil prices and to dampen demand for bigger bore vehicles.
That was before the big meltdown. Now with oil down along with everything else, China is taking the foot off the brakes and putting the pedal to the metal.
Interestingly enough, they are doing that while the market is still growing. The Chinese government has several vested interests in the health of their automobile industry.
For one, nearly all joint venture partners of the US, European, Japanese and Korean manufacturers are state owned.
For two, they employ a lot of people, and nobody wants them on the streets.
For three, it affects parts manufacturers who are already groaning from a lack of foreign demand.
Anecdotal evidence: This morning, we received a call from Alibaba, China’s export trading platform of choice, and partner of Yahoo. They slashed their annual listing fee from 50000 Yuan down to 18000 Yuan.
Cutting prices and taxes in downtimes to rekindle growth seems like a simple idea, no?
Reverse psychology?
As announced, the Chinese act fast: Today, China announced a massive stimulus package that will pour more than half a trillion dollars straight into their economy. The package consists of tax cuts and massive spending.
Unlike other countries, China can afford it: The package reflects approximately 15% of China’s GDP, and a third of its foreign currency reserves. To put it further in perspective, the package is as big as Australia’s total GDP.
The announcement of the package lifted stock markets around the world.
Bertel’s 07:38…
The reduction in the consumption tax isn’t particularly significant. This second item is the big Kahuna. Infrastructure improvements increase China’s ability to be productive and profitable.
The US stiumulus of the last few years has been on consumption, which may improve our infrastructure but only in a very roundabout way.
I agree the second item being the big kahuna. The first item is a part of it. Consumption tax not significant? Imagine what would happen to US car sales if the sales tax on cars would be scrapped? Now depending on where you live (ignoring Delaware, Alaska, et al) sales tax is anywhere between 4 and 7.5 percent. City and county want their share too. Now picture a sales tax of 40 percent being scrapped. You think that’s not significant? The Chinese are very prudent and count every fen …their version of a penny, or make that 1/6th of a penny.
Unlike other countries, China can afford it:
Other than the little fact that China has a totalitarian/communist gov’t and we don’t (really, we don’t) the above factoid is key. Any support we give to any industry is just more borrowed money to add to the pile. The typical homeowner over the past few years may have gotten warm fuzzies over paying off credit card debt with home equity, but he shouldn’t have.
@br549; Some old obsessions never die.
Some say, China was never truly communist. And these days, it’s more capitalist than ever.
It’s a country of merchants, a gene-pool cultured over thousands of years. Everything in this country is about buy and sell, down to yin and yang.
@br549; Some old obsessions never die.
I guess I would hesitate to label the realization of China’s utter centralized control of it’s economy an obsession. China’s leaders allow measured capitalism because they are smart enough to know that it’s working to their advantage. Can’t deny that it really is working either.
But one can neither deny the ruthless and unquestioned land seizures (read Three Gorges Dam project) and complete control these guys wield over the citizenry whenever they deem it to be in their best interest, hence the rapid changes to taxation, stimulous packages, and infrastructure expenditures they can enact on whim without any pesky old representatives standing in their way as they speak for their constituencies.
That, my friend, is totalitarianism, even if it does have capitalistic face.
I wonder if China is taking a page out of Ronald Reagan’s playbook: instead of outspending the “evil empire” in a global arms race (I know their outlook on America isn’t so black-and-white, but go with me here) they seem to be trying to spend us into oblivion economically. Mind the bailout gap!
The USA has the same ruthlessness with land seizures for big projects as China. It may even be more ruthless (not considering the theft of America from the Indians because then it won’t be a maybe)
The 40% tax is for engines bigger than 4 liter. Modern car who have engines that large are not exactly cheap and chearfull.
@br549: China doesn’t have to seize land. All land is owned by the state. If they need it, they just take back what’s theirs.
Not an alien concept: A good chunk of London is owned by the Crown, and 99 year leases are as common in Old Blimey as 75year leases are in China …..
Closer to home, Battery Park City, where I lived and where the World Trade Center was, is sitting on leased land. Owned by the City of New York City. The Southern part of it patrolled by the National Park Police. Walking my dog there was a federal offense, I was told, several times.
Some countries’ views differ from the Fifth and Fourteenth Amendment. It’s their countries and their beliefs.