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Dealers push for tax cut as growth stalls
Reuters | 2018/10/12

BEIJING -- China's top auto dealers' association asked the government to halve taxes on car purchases to revive faltering sales, sources said, as worries grow the country's auto market could shrink this year for the first time in decades.

The China Automobile Dealers Association submitted documents last month to the country's finance and commerce ministries proposing the 10 percent auto purchase tax be halved, two people at the industry body told Reuters.

The influential body has made proposals in previous years that have helped shape auto policy. When China last cut the purchase tax three years ago, car sales soared in the world's biggest auto market that is a key battleground for global carmakers from General Motors to Toyota Motor.

The China Automobile Dealers Association's initiative comes as Beijing seems concerned about China's auto industry, an important barometer of the health of the world's second-largest economy. It has launched stimulus measures as a bruising trade war with the United States is pressuring economic growth.

One of the people said the commerce ministry met with automakers this week to discuss the market and ways to spur growth, which included purchase tax cuts -- a signal the central government may be warming to the idea.

"The overall car market is weak this year. Dealers I know are struggling to maintain their sales volumes as they feel pressure from both carmakers and cash flow," said the second person, a dealers' association official.

He confirmed the industry body had proposed to the two ministries to lower the purchase tax rate. "We asked for a 50 percent cut but any reduction could help."

The first person, a dealers' association insider familiar with the plans, said the association was seeking a 50 percent cut to the purchase tax on cars with engines of 2.0 liters or smaller, similar to the tax rebate on smaller-engine cars that helped drive rapid growth in 2016.

This person added it was unclear what the finance ministry and commerce ministry would do in response, but that the commerce ministry had met with carmakers this week to "discuss the performance of the auto market, sales trends and taxation".

China's Ministry of Finance and Ministry of Commerce did not immediately respond to requests for comment. The dealers' association insiders did not want to be identified because of the sensitivity of the matter.

The dealers' association's secretary general, Xiao Zhengsan, said the market might decline slightly this year, but measures such as promoting the rural car market or adjusting the value-added tax for secondhand cars may bolster sales. He did not comment on the purchase tax cut proposal.

A spokesman for the China Association of Automobile Manufacturers, Xu Haidong, said the nation's top auto industry body had not proposed cutting the purchase tax.

Dealers squeezed
China's auto sales grew a steep 13.7 percent in 2016, in large part aided by the tax break, but started to slow when the tax rebate was phased out last year.

Its auto sales fell 3.8 percent in August and 4.0 percent in July, official data show. The manufacturers' association is set to release September sales data on Friday. A person with knowledge of the figures said "the situation is bad."

China's army of car dealers are caught in the middle, facing a buildup of inventory and having to slash prices to maintain their sales volumes.

"Almost everyone is doing the same thing," said the manager of a car dealership in the southwest metropolis of Chongqing, asking only to be identified by his surname Li. "We lose money from selling cars ... so if we sell too many cars, we will simply lose more money."

The dealers' association represents thousands of retailers nationwide. Bigger names include Sinomach Automobile Co., Pangda Automobile Trade Co., China Yongda Automobiles Services Holdings, Zhongsheng Group Holdings and China Grand Automotive Services Co.

Analysts said that without government support China's auto market could slip to its first annual sales decline since the early 1990s, when the sector started to take off and lure in global carmakers.

Alan Kang, a Shanghai senior analyst at consultancy LMC Automotive, cited "sluggish" retail demand, "bloated dealership stocks" and the escalating trade conflict for his company revising down its outlook for market growth to -0.3 percent for the year.

Tax cuts could change that, at least in the short term.

"Our view is that purchase duty cut policy would stimulate the market," he said. "However, it simply pulls demand ahead from the years beyond, without actually creating new demand."

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