Chinese government should encourage small cars

Chery A1

Shanghai, China -- By doling out huge subsidies to state-owned oil refineries, the Chinese government has long kept prices of gasoline and diesel fuel artificially low.

What's more, for fear of stoking inflation, the government has maintained fuel prices unchanged since the beginning of November 2007. Annual inflation in China reached 8.5 percent in April.

Artificially low fuel prices have created exuberant demand for big, expensive cars. Now, with petroleum prices rising, it's time for government policies to change. The government should encourage small cars with lower taxes.

According to a recent report released by China International Capital Corp., a leading domestic investment bank, fuel prices such as gasoline and diesel in China now are about 50 percent lower than international averages.

One liter of the most widely used grade of gasoline costs 5.3 yuan (76 cents), the equivalent of $2.89 per U.S. gallon.

The existing oil price control policy has distorted auto market demand. In the first four months of this year, SUV sales surged 40 percent year-on-year to 140,000 units, according to Automotive Resources of Asia (ARA), an affiliate of J.D. Power & Associates. The longer the government distorts the market, the more difficult adjustments will be later.

To be sure, the best way to correct market distortions created by cheap oil prices is for the government to relax price controls.

Actually, that appears what the government will do. The government is widely expected to grant a fuel price rise later this year.

But if the government chooses to keep subsidizing fuel prices, another policy will help. The government can encourage small cars.

The government can provide tax incentives and make parking cheaper for small car buyers. Such measures have proved to be effective in Europe and Japan.

The existing tax system offers virtually no incentives for consumers to buy small cars. Regardless of the size of the vehicles they buy, auto buyers pay a flat 10 percent vehicle acquisition tax.

"From a tax point of view, it doesn't make much difference to consumers whether he buys a [Chery] QQ or a Bentley," says John Zeng, a senior market analyst with Global Insight in Shanghai.

Some domestic automakers say they are ready to produce more small cars if the government can support them with proper policies.

At the Automotive News China Conference in April, Wang Fengying, president of Great Wall Motor Co, urged the government to encourage small-displacement cars.

Wang said she believes there is great potential in the market for small cars in China because of rising fuel prices.

But for the market to truly take off in China, she said the government needs to offer tax incentives to consumers to buy small cars.

It is time for the government to heed such calls.

[Source : Automotive News China (Subscription Required)]