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How Beijing can fix China's fragmented used-car market
Yang Jian | 2017/9/8

SHANGHAI -- Beijing, eager to revive the nation¡¯s stagnant economy, asked China¡¯s municipalities last year to lift bans on the sale of used vehicles from other cities.

But since then, it has done nothing to boost the used-car market. 

That¡¯s a shame. With a little more effort, the government could unleash pent-up demand for secondhand vehicles -- and give struggling dealers a financial boost.

To do so, the government must take two steps. 

First, Beijing should follow up on its effort to prod city officials to open their used-car markets to vehicles from other locales. 

The original directive already has yielded some results. Heeding Beijing¡¯s call, a number of inland Chinese cities have started allowing local dealers and residents to buy secondhand cars from other cities.

As a result, China¡¯s used-vehicle sales rose 10 percent last year. And in the first six months of 2017, sales increased 22 percent to 5.8 million units, according to the China Automobile Dealers Association. 

But this rally is likely to run out of steam, as more than 200 cities in China¡¯s interior still refuse to allow sales of used vehicles from outside.

To make things worse, cities in two vibrant coastal regions -- the Yangtze River Delta and the Pearl River Delta -- as well as municipalities near Beijing are exempted from the policy. 

These cities claim more used vehicles would aggravate air pollution. But that shouldn¡¯t be a problem as long as the municipalities replace their bans with reasonable vehicle emission tests.

The second step the government should take is to ease the tax burden on dealerships.

Now, a used-car dealership pays a tax equal to 1.48 percent of the vehicle¡¯s transaction price. Nearly all that tax goes to the central government, which explains why the cities have little incentive to encourage used-car sales. 

And that explains why used-car sales in China are so anemic, even though the country is the world¡¯s largest market for new vehicles.

In China, the ratio of used-car sales to new-vehicle deliveries is less than 44 percent. By contrast, used-vehicle sales in the United States are more than twice as high as new-car sales.

In the U.S., savvy dealers can make a nice profit on used cars even if the new-vehicle market has gone soft. Not so in China.

Last year, used-vehicle sales generated only 5 percent of Chinese dealership profits -- a percentage that hasn¡¯t budged in three years, according to J.D. Power, a consultancy.

To be sure, China¡¯s auto market is still young. The average Chinese family didn¡¯t start buying cars until the start of this century, so it¡¯s unrealistic to expect China¡¯s used-vehicle market to match that of the U.S. anytime soon.

Consumer attitudes are another complicating factor in China, where car buyers confirm their social status by buying a new car.

That¡¯s why only 3.7 percent of first-time car buyers would consider a used vehicle, according to a J.D. Power survey this year. 

It takes time for consumer attitudes to change. But it wouldn¡¯t take long for Beijing to fix its problematic tax policies and tear down municipal barriers to used-car sales.

If the government can do so in a timely manner, it would be a boon for used cars and the dealerships that sell them.

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