 | Chinese Auto Stimulus |
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| Posted Under: Autos • Government |
A tax cut? In China? We couldn't believe our ears! In the wake of a myriad of other measures to shore up its slowing economy, China announced Tuesday that the auto industry would be the focus of its latest stimulus measures. Starting Oct 1st, and continuing through the end of 2016, China will cut the sales tax on cars with engines of 1.6 liters or less from 10% to 5%.
Now don't get us wrong, we aren't usually on team China when it comes to economic and monetary policy making, but it's refreshing to see the Chinese forego QE (at least for now) in favor of tax cuts for consumers. If we had our way, the tax cuts would be across the board, not just for the auto sector, and permanent. But we will give credit where credit is due. A tax cut is a tax cut, and, even if it is limited to one area of the economy, it boosts the real spending power of consumers. And, according to Bloomberg, the market for these incentive eligible vehicles makes up 68% of total Chinese vehicle sales, meaning the benefits of this stimulus will be felt by a broad swath of its citizens.
So why is China acting now? Bloomberg reports vehicle sales have fallen for five consecutive months, and SAIC Motor Corp, China's largest auto manufacturer, recently cut its industry growth forecast for the year to 0%. With these worrying trends afoot (and a government looking to boost consumption driven growth), the state-backed China Association of Automobile Manufacturers took the opportunity to lobby the government for the tax cut.
It isn't every day that we agree with Chinese policy makers, and we certainly haven't agreed with many of their economic management efforts to date, but when compared with continuing zero interest rate policies in the U.S. and the ongoing European QE, this latest move by Beijing is a net positive. Tax breaks like these improve living standards by making goods more affordable, and we hope to see more policies like these in the future. China is undertaking a difficult transition to an economy that relies more broadly on domestic consumers rather than one based on overdone infrastructure investment and exporting to the rest of the world.
Before you think we have lost our minds by supporting China in this, we have some quibbles. Targeted tax cuts distort resource allocation. Cutting sales taxes across the board would have been better and would have respected the autonomy of the consumer. Nonetheless, we never argue with tax cuts. As a result, we view this as a positive move.
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