On May 31, 2022, in order to promote automobile consumption and support the development of the automotive industry, the Ministry of Finance and the State Taxation Administration issued the 'Announcement on Reducing the Vehicle Purchase Tax for Some Passenger Vehicles'. For passenger vehicles with a displacement of 2.0 liters or less and whose purchase date was between June 1, 2022, and December 31, 2022, the vehicle purchase tax is halved. Local governments have also introduced plans to promote automobile consumption that are tailored to their local characteristics, such as issuing consumption subsidies and increasing the number of fuel vehicle license plates.
The automotive industry has always been an important part of China's economy. As one of the solid measures previously issued by the State Council to stabilize the economy, how significant is the reduction in purchase tax this time? What role does it play in boosting the automotive consumer market?
The policy of reducing or exempting the purchase tax on passenger vehicles is not new. In 2008/2009 during the Asian financial crisis and in 2015/2016 when automobile sales were weak, some vehicle models enjoyed preferential treatment under the purchase tax reduction policy. Compared with the previous two subsidy policies, this time the scope of eligible models has increased from 1.6T to 2.0T, covering a broader range; the purchase tax has been halved from 10% to 5%, with basically consistent reduction levels.
Data sources: Public materials, LeadLeo Research Institute, Frost & Sullivan
The vehicle purchase tax has been halved from 10% to 5%, meaning that consumers purchasing a passenger car priced at 200,000 yuan (including value-added tax) can reduce their vehicle purchase tax by half from 17,700 yuan to 8,850 yuan, saving nearly 10,000 yuan. This time, the reduction in China's automobile stimulus policy amounts to up to 600 billion yuan, while the total amount of vehicle purchase tax in China in 2021 was 352 billion yuan, accounting for as high as 17%. It can be said that this has greatly stimulated and consolidated the confidence of the automobile consumer market. Against the backdrop of repeated outbreaks of the epidemic and significant downward economic pressure in China, this stimulus policy plays an especially important role in boosting automobile consumption.
Looking back at 2009/2010 and 2015/2016, under the previous two rounds of policy subsidies, the development trajectory of China's automotive market was as follows:
Data sources: Public information, China Passenger Car Association, LeadLeo Research Institute, Frost & Sullivan
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[First Round of Subsidies, 2009-2010]
Models below 1.6L accounted for 62% of the retail sales of passenger cars in 2008, with a total sales volume of 3.52 million units. In the first year after subsidies were introduced (2009), the retail sales of models below 1.6L soared to nearly 5.38 million units, a year-on-year increase of as high as 53%. In the following year, 2010, although subsidies were phased out (the purchase tax reduction from 5% to 2.5%), the growth momentum of automobile sales continued. In that year, the retail sales of models below 1.6L reached 7.37 million units, a year-on-year increase of 37%. China's annual retail sales of passenger cars even reached 11.34 million units, strongly entering an era of tens of millions in retail sales.
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[Second Round of Subsidies, 2015 - 2016]
Models below 1.6L accounted for 70% of the retail sales of passenger cars in 2014, with sales amounting to 12.45 million units. The subsidy period started in October 2015, leaving only 2 months of eligibility for subsidies that year. However, the retail sales of models below 1.6L still increased by 1.73 million units year-on-year, maintaining a basically unchanged year-on-year growth rate. By 2016, due to the subsidy policy extending throughout the year, the retail sales of models below 1.6L soared by 24% year-on-year, reaching 17.54 million units. The total retail sales of passenger cars that year even increased by 3.56 million units, reaching 23.22 million units, leading China's passenger car retail sales to exceed 20 million for the first time.
As can be seen from the first two rounds of subsidies, the subsidy policy in the form of exemption from purchase tax is direct and has been highly effective.The subsidy scope for models below 1.6L covers the vast majority of vehicle types in China. The result of this type of subsidy has not only avoided the potential decline in China's passenger vehicle market but has also directly ushered China's passenger vehicle industry into a new era.However, it is also worth noting that for some time after the subsidy ended, the sales of subsidized models also significantly declined.For example, after the first round of subsidy policies ended in 2011, the year-on-year growth rate of sales for models below 1.6L dropped directly to around 10%; in 2017, after the second round of subsidy policies ended, the year-on-year growth rate of sales for models below 1.6L declined to -4%.It can be seen that subsidy policies have an effect of overdrawing into the future.
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[Subsidy for this round, 2022]
Since 2022, affected by pandemic lockdowns, the cumulative retail sales of narrow-sense passenger vehicles in January to May this year were 7.315 million units, a year-on-year decrease of 12.8%, or a reduction of 1.07 million units. Among them, the year-on-year decrease from April to May was 860,000 units, which was significantly impacted. In fact, since 2017, China's automobile sales have entered a downturn, and the recent recurrence of the pandemic has further exacerbated this trend. Against this backdrop, the Chinese government has introduced a 600 billion yuan automobile purchase subsidy policy aimed at boosting China's automobile consumption market. In terms of model coverage, this subsidy is slightly different from the previous two rounds, with the subsidy covering models priced below 300,000 yuan and with a displacement of less than 2.0L.
Data sources: Public information, China Passenger Car Association, LeadLeo Research Institute, Frost & Sullivan
Based on the recent new car retail historical data (above chart), it can be found that models priced below 300,000 yuan and with a displacement of 2.0L are the absolute mainstay of passenger car sales in China. In 2017, these models accounted for 92% of the market share, but due to the rapid development of new energy vehicles, their market share has decreased. However, as of 2021, models priced below 300,000 yuan and with a displacement of 2.0L still account for 77% of the market share, indicating that the coverage of this round of subsidies has exceeded that of the previous two rounds.
From the perspective of policy background, subsidy content, and model structure, this round of subsidy stimulus shares certain similarities with the previous two rounds. Therefore, we believe that the automotive market will begin to show clear signs of recovery in the second half of this year.
However, the development of the automotive market is not only affected by internal factors but also constrained by external ones. Compared with 2009 and 2015, China has undergone earth-shaking changes today. In 2021, China's GDP reached 114.4 trillion yuan, which is 1.7 times that of 2015 and 3.3 times that of 2009. The country has entered different stages of development, and the quality of life of its people has also undergone a qualitative leap. For the development of the automotive industry, it is even more necessary to comprehensively consider relevant factors of society as a whole.
The following figure briefly illustrates some changes in China's transportation sector during the three stages of 2009, 2015, and 2021. China has made tremendous progress in rail transit, urban public transportation, shared mobility, and per capita car ownership. This means that China's transportation facilities have been further improved, and residents do not need to rely too heavily on private cars for daily travel. The subway system is becoming increasingly developed, online car-hailing is becoming more widespread, and with the further increase in car ownership, urban road resources are becoming more scarce. Today's consumers' rigid demand and willingness to purchase private cars are showing a downward trend.As can be seen from the above, the external environment in which China's automotive and mobility industries operate has undergone significant changes, and the core of growth in the automotive sales market is also quietly transforming.
Data sources: Public documents, National Bureau of Statistics, Frost & Sullivan
Of course, with the increase in national income, a considerable portion of people's car purchases are aimed at improving their living standards. The following chart shows the disposable income per capita at different stages, clearly indicating that the growth rate of per capita disposable income in our country is quite impressive. However, at the same time, housing prices in our country have increased even faster. To a certain extent, housing prices have dragged down consumers' purchasing power for large consumer goods, which is also one of the important reasons for the continuous decline in China's automobile sales market for many years since 2017.To stabilize the economy and stimulate growth, real estate policies have continued to be relaxed this year. Against the backdrop of consumers' pessimistic expectations about their income, loose interest rate policies are being used to cope with maintaining high housing prices.
Data sources: Public documents, National Bureau of Statistics, Frost & Sullivan
This year, the epidemic has recurred, putting pressure on the economy, and consumer spending has become relatively conservative. However, we still firmly believe that the Chinese market has the resilience it deserves and are optimistic about the overall development of China's automotive industry in the future.
In the current period, when consumers lack the motivation to purchase cars actively, the reduction in purchase tax stimulated by this round of 600 billion yuan in car purchase subsidies has exceeded expectations, playing an important role in boosting consumer confidence.Although we anticipate that there will still be some pressure on year-on-year growth in retail sales of passenger vehicles for the whole year, for the second half of this year, the automotive market is expected to show a relatively clear recovery trend.
