Reduced sales tax discount on small vehicles cools car sales in 2017

China has become the world's largest car market in recent years as Chinese have been keen to adopt the driving lifestyle. The stock of passenger cars rose from around 90 million in 2012 to 160 million in 2016. And there is still plenty of room for growth: car ownership was only 0.35 cars per urban household in 2016. For example, Finnish households own about one car per household (rural and urban areas combined).

Despite the appeal of driving, car sales slowed in 2017. Passenger car sales were up just 2 % y-o-y in the January-November period (in the same period in 2016, sales were up 16 %). Annual sales of new cars in China today have reached nearly 25 million passenger cars and over 4 million commercial vehicles.

Much of the high growth in 2016 car sales reflects a tax incentive in which the government temporarily halved the 10 % sales tax on cars with engine volumes of less than 1.6 litres. The sales tax was then increased to 7.5 % in 2017, and this year restore to 10 %. Given the reinstatement of the sales tax at its old level, the outlook for car sales this year is modest at best, even if people in inland towns and cities are wealthier and financing of car purchases by loans is increasing.

Domestic car makers held on to a 43 % market share in January-November 2017. China aggressively protects its domestic car industry to the detriment of foreign carmakers. Foreign carmakers face such requirements as having to enter into joint ventures with Chinese firms to be allowed to operate in China.

Sales of electric and hybrid vehicles in China last year reached 500,000, which corresponds to about half of global sales of electric and hybrid vehicles. Despite the high growth, sales of such vehicles represent only a few per cent of total passenger car sales.