China car policy dents HK auto stocks; outlook firm

Beijing's tweaking of its car purchase incentives surprised many as lacking in generosity, but analysts expect pent-up demand in smaller cities to keep the world's biggest car market growing by double digits next year.

China said on Wednesday it would raise the sales tax rate on small cars to 7.5 percent next year, a move that could save it roughly 10 billion yuan ($1.47 billion) a year, according to China's official auto industry association.

That is still lower than the 10 percent before Beijing halved the rate this year on cars with 1.6 litre engines or smaller, fuelling a 50 percent spike in car sales in the year to date.

But many automakers had hoped Beijing would maintain the generous stimulus beyond the planned Dec. 31 expiry, with some even anticipating the preferential tax rates to spread to 1.8 litre-engine cars.

"It's indeed a big surprise," said a senior executive with sport utility vehicle (SUV) maker Great Wall Motor Co (2333.HK).

"We had heard so much positive rhetoric from government officials lately and there was absolutely no hint that the tax would go up," said the executive, asking not to be identified because of the sensitivity of the matter.

Shares in Hong Kong-listed Chinese automakers fell on Thursday, with Geely Automobile Holdings (0175.HK) plunging 8.2 percent to close at $HK4.23.

Dongfeng Motor Group Co (0489.HK), the Chinese partner of Honda Motor Co and Nissan Motor Co, ended down 6 percent at HK$10.96. Denway Motors (0203.HK), also a Honda partner, finished the day down 8.1 percent.

"This is bad news as car buyers have to pay more now," said Johnny Wong, an analyst at Yuanta Research.