Tuesday, January 6, 2009

Proposal to Support China's Auto Industry

The NDRC and State Council, with help from a host of other concerned ministries and organizations, are working on a plan to boost China's auto industry. Ideas being discussed include either reducing, or completely eliminating sales tax on small or low-emission autos, and helping auto firms with credit and financing. There is also discussion of a rule that government organizations must "buy Chinese" -- not merely cars made in China, but those designed in China (自主品牌).

Unlike US government help which is designed merely to keep the three US automakers afloat, the stated purpose of China's plan is to maintain at least 10 percent growth in its domestic industry which has about 50 different players. (Obviously, some consolidation is in order; plans for this have been under discussion for some time.)

I'll be interested to see the final proposal which is supposed to be approved sometime after Spring Festival. While the tax breaks are a no-brainer, the help with financing being proposed is probably dominating discussion at the State Council. Are we to expect more state-directed lending, or possibly an easier path to stock market listings? What would be done with the extra funds? Would they be used for expansion (not something needed while demand is low), R&D (great, but it wouldn't significantly boost the economy in the short-run), mergers and acquisitions (again, great, but not necessarily a good short-term boost)?

My best guess would be none of the above. Rather, the idea would probably be to provide working capital loans to help some of the weaker players avoid bankruptcy (and unemployment). This would alleviate some short-term pain, but, as with massive debt being accumulated in the US bailout, there would be a longer-term price to pay.

The tax breaks, however, are smart move. Car sales have been down in recent months due to decreased demand from Chinese consumers. Getting them to spend some of their massive savings on cars will not only be a boost to China's domestic economy, but also take some pressure off of exports as a major driver of China's economy.

But where will they park all those cars?