China bails out steelmakers and car industry

The Chinese government has announced a rescue package for its car makers and its steel industry in order to revive the faltering powerhouses of its economy.

Sales tax on all cars with engines below 1.6 litres will be halved to 5pc and 5 billion renminbi (£500m) will be set aside as incentives for rural families to trade in their old cars for new low-emission vehicles.

The government will also give the almost entirely state-run Chinese car industry 10 billion rmb to develop “alternative fuel vehicles” over the next three years. There was no mention of an earlier proposal to force the Chinese government to give up its Audi saloons for domestic motors.

China’s car sales are set to grow by just 5pc this year, the slowest pace for a decade, according to the latest figures from the China Association of Automobile manufacturers. The government wants growth to be at least 10pc, and is hoping that a revived car industry could take some pressure off exports as the engine of Chinese economic growth.

Sales in China have fallen for four of the last five months, and the government has already slashed road tolls and lowered the “guidance price” for petrol to stimulate demand.

Many car manufacturers, including Volkswagen, have suspended production lines because of the huge number of cars being held in inventories in China. Consumers are holding off new purchases in the expectation that desperate car dealers will be forced to discount certain lines.

Overall vehicle sales tumbled 12pc in December to 741,600. Car sales in India also dropped 7pc last month.

The measures are expected to help smaller carmakers, such as BYD, the former battery manufacturer which unveiled the world’s first electric hybrid car at the Detroit Motor Show earlier this week, beating all the major car makers to get a model out.

However, analysts were not optimistic about whether the bailout would succeed. “Car consumption depends heavily on consumers’ real affordability and confidence in their future income level,” said Kate Zhu from Morgan Stanley. “We expect China’s vehicle demand to get worse in the first half of this year before recovering in late 2009 or 2010.”

Meanwhile, the government said it would strictly control steelmaking capacity in order to raise steel prices. The State council said that it would speed up the closure of inefficient plant and that no new steel factories would be given planning permission.

The mainland’s steel industry, the biggest in the world, has a capacity of 660 million tonnes but its output was about 500 million tonnes at the end of last year. However, the £400 billion Chinese fiscal stimulus is expected to create enormous demand for steel. Beijing also promised a more flexible export tax policy on steel for export.

By Malcolm Moore in Shanghai
Last Updated: 9:05AM GMT 15 Jan 2009

Source: The Telegraph

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.