Great Wall Motor Haval brand vehicles on display at the 16th Shanghai International Automobile Industry Exhibition in 2015. Photo: Bloomberg News
A sales tax cut and motorists’ love for SUVs have created winners and losers in China’s auto industry. Since Beijing cut its car sales tax more than a year ago, investors have crowded into Geely Automobile Holdings, sending its stock 180% higher, while Great Wall Motor is up only 20%. It’s time to reverse the trade.
To boost the economy, Beijing announced last October that it would slash the 10% purchase tax in half. This tax break is set to expire at the end of 2016. But it could be extended, possibly in reduced form.
Chinese consumers embraced the tax reduction. In the first nine months of 2016, vehicle sales rose almost 15% from their year-earlier levels, while the auto industry saw a 13% boost in profits. Sport-utility-vehicle sales were stellar, soaring 46% year over year.
Macquarie Research’s Zhixuan Lin thinks that Beijing probably will extend the tax cut, thereby supporting healthy growth next year. While the auto industry is China’s third-largest industrial sector in revenue, it’s already the largest in profits, accounting for almost 10% of China’s total. Given the weak state of the economy, Beijing will likely raise the rate to 7.5%, but not take it back to 10%, similar to what it did in 2009, predicts Lin.