Industry Trend Analysis - Car Sales To Weaken As Taxes Rise - MAR 2017


BMI View : The Chinese government ' s decision to extend but raise the sales tax levy on small - engine vehicles will lead to a dampening of passenger vehicle sales in 2017 as prices rise. Car s ales will weaken further in 2018 as tax rates on these vehicles normalise to the previous rate of 10%.

In December 2016, the Chinese government announced it would extend but raise the sales tax levy on small-engine vehicles (engines with displacements of 1.6 litres and smaller) in 2017, but keep the charge below the previous 10% level. Effective from January 1 2017 to December 31 2017, the tax rate on small-engine vehicles, currently at 5.0%, will rise to 7.5%. The announcement made by the Chinese Ministry of Finance further stated the tax rate would be restored to the norm of 10% by January 1 2018.

We have previously mentioned how uncertainty around whether or not the tax break will be extended beyond 2016 would lead to consumers bringing their vehicle purchases forward and thus erode potential demand in 2017 ( see 'End Of Tax Break Will Dampen 2017 Vehicle Sales', October 27). Given this decision by the Chinese government to raise the tax rate but keep it below 10% in 2017, we maintain our view that passenger vehicle (PV) sales will grow at a slower pace in the year ahead due to the associated rise in vehicle prices. We forecast PV sales to grow 3.9% in 2017, with growth slowing further to 3.0% in 2018 once tax rates normalise, down from a previously forecasted 3.7%.

Slowing Sales As Tax Rates Rise
China - Passenger Vehicle Sales, Units
f = BMI forecast. Source: CAAM, BMI

Spending Already Done In 2016

We believe that car sales in 2017 would not have seen the same robust growth witnessed over 2016 even if the Chinese government had decided to maintain the sales tax at 5.0%, due to this year's rush to purchases which brought sales forward. PV sales in China rose 15.4% y-o-y in 10M16 with the market share of small engine vehicles reaching a record 73.1% of total passenger car sales ( see chart below).

Consumers Rushing To Beat End Of Tax Break
Passenger Vehicle Monthly Sales Volume, % chg y-o-y (LHS) & Market Share of Passenger Vehicles with [?]1.6L Engines , Sales volume as % of total PV (RHS)
Source: Fitch, CAAM

We therefore believe consumers will complete the majority of their vehicle shopping in 2016, resulting in weaker new car demand in 2017. However, by raising tax rates at a gradual pace over the next two years, we believe that China's autos market will avoid the hard landing it might have had if tax breaks had been eliminated altogether at the end of 2016.