Staff Reporters

In order to stimulate the weakening auto industry, China's Premier Wen Jiabao last month chaired a State Council regular meeting and approved in principle the auto industry revitalization plan and detailed supportive measures. Under this plan, the purchase tax on passenger vehicle with engine of 1.6 liters or below is cut to 5% from 10%, effective from January 20 to December 31.

New policy benefiting 60% of car buyers

With this new purchase tax policy, consumers can now receive a "visible" price cut when purchasing low-emission passenger cars.

At present, a car price consists of two parts: firstly, the original price of the car (including total cost of the product and profit made by the seller); and secondly, the 17% VAT (The VAT is paid by carmaker upon product entering the market). Only the non-tax part of the price is taxable for the 5% purchase tax, that means, the amount of purchase tax is only 5% of the total cost plus profit made by the seller. Therefore, the 17% VAT must be deducted from the car price before calculating the car purchase tax, i.e.:Taxable price for purchase tax = invoice price∫(1+17%)

Take a RMB 100,000 car with 1.6-liter emission as an example, the amount of purchase tax that consumer would have to pay before January 20 is RMB 100,000∫(1+17%)x10%=RMB 8,547. And after halving the purchase tax rate to 5%, the amount of the tax is reduced to RMB4,274, (RMB 100,000 ∫ (1+17%)x 5%=RMB4,274), helping consumer to save more than RMB4,000.

According to Zhang Boshan, secretary general of the China Association of Automobile Manufacturers (CAAM), in China, sales of passenger cars with emission of 1.6 liters or below account for 60% of the total passenger car sales. Therefore, most consumers can be benefited from the new purchase tax rate.

New policy speeding up small-displacement car launches

The Chinese government has never before introduced such encouraging policy for the auto industry and it reflects a positive attitude towards the car market. Some analysts estimate that the policy will further boost new car sales by around 3%. As 2008 vehicle sales are 9,380,500 units, a 3% growth means sales of 2009 may possibly reach 2.81 million units.

The tax cut, taking effect before the Lunar New Year holidays, a major sales season in China, fueled car buyers' enthusiasm for small-displacement cars. Major domestic brands, including Chery, Geely and BYD, which have models under 1.6 liters recorded high sales in January. And in fact, to get a share in the optimistic low-emission car market, most domestic carmakers, including FAW, SAIC, Dongfeng, Chery, Geely and Greet Wall, are planning to release new models with low-emission engines in 2009.

Spokesman of Chery says that the carmaker is now planning to release four to five new car models with engines not more than 1.5 litres. At the same time, Geely is now preparing its new small passenger cars with brand new 1.3-litre engines. Great Wall Motors also admits that low-emission cars will be the highlights of its 13 new models for this year.

SAIC, one of the Big Five carmakers in China, is now planning to equip the 5 series of its MG5 and Roewe 350 with turbocharged engines from 1.3-liter to 1.5-litre emissions. As introduced by the carmaker, the maximum power output of the 1.5-litre turbocharged engine is much more than that of a 1.8-liter engine.

FAW will launch its 1.6-liter Benteng B50 sedan early 2009.

Besides, early this year, FAW will launch its Benteng B50 sedan, which was first unwrapped during the Beijing Auto Show 2008. To apply the 1.6-liter engine into the new model, the carmaker said it has reduced weight of certain parts and components, making the B50 sedan weights less 50 kilograms than its pervious model B70.

Meanwhile, another "Big Five" carmaker Dongfeng Motor Corporation is also expected to launch its first own-branded passenger vehicle with a 1.6-litre engine. As reported, the launch is scheduled in March.