Beijing should extend tax cut for small vehicles right now

A year ago, the Chinese government halved the purchase tax for light vehicles with engine sizes of 1.6 liters and below. 

Sales subsequently jumped, as expected, but now the government faces a problem of its own making. 

When the tax incentive expires on Dec. 31, vehicle sales are expected to stagnate. That could be a big problem for automakers that have invested heavily to expand production.

To ease high-flying auto sales into a more stable growth pattern, the government should gradually phase out the incentive, rather than end it abruptly in December.

In China, cars with engine displacements of 1.6 liters and under account for 70 percent of sales. On average, these vehicles are sold for less than 100,000 yuan ($14,800). 

More than half of small-car buyers are consumers with modest incomes who are very sensitive to price changes.

That's why a 50 percent reduction in the purchase tax -- which can save a car buyer up to 5,000 yuan -- can be a powerful sales stimulant.

In theory, the government should be prudent about injecting such a heavy dose of stimulus into the market. But in 2015 it slashed the tax anyway to boost car sales and prop up the economy.

The China Association of Automobile Manufacturers has lobbied the government to extend the tax cut for another year, but Beijing has stayed mum.

Fearing the incentive would soon end, car shoppers rushed into dealerships last summer. In July and August, light-vehicle sales jumped 26 percent, and September volume rose 29 percent.

As the December deadline looms, more consumers will pile into the market to take advantage of the soon-to-expire tax cut. That means car sales likely will post even higher growth in November and December. 

But vehicle demand in China will cool off significantly next year after the current binge sputters out, and automakers have good reason to worry.

When a similar tax cut for small vehicles was phased out at the end of 2010, light-vehicle deliveries rose only 2.5 percent in 2011, down from 33 percent the previous year.

IHS Markit believes history will repeat itself. Last week, the sales consultancy predicted that China's car sales will edge up 0.8 percent next year and 3 percent in 2018.

Such a dim outlook is especially worrisome to automakers such as Hyundai Motor Co. and PSA Peugeot Citroen. The two companies have underperformed in the market this year, but each recently opened a big assembly plant.

And now China's bureaucrats have started to worry. On Tuesday, the Ministry of Finance, the National Development and Reform Commission and the Ministry of Transportation met in Beijing to debate an extension of the tax cut. 

No decision was reached, according to the Economic Observer, a Beijing-based newspaper. 

Some officials reportedly wanted to renew the tax cut. But at the meeting, one ministry opposed the extension while the others did not voice an opinion, the newspaper reported, citing an unnamed official.

With the end of the year approaching, we are starting to run short of time. A responsible government should renew the tax cut for another year -- and announce it soon. 

That would prevent auto sales from taking another rollercoaster ride, and it would allow automakers, suppliers and dealers to plan ahead.

The government created this problem, and now it has to fix it. And hopefully Beijing has learned an important lesson: As long as China's economy is growing, it shouldn't mess around with artificial sales stimulants such as tax cuts.