For the rebound of China's auto market in this year's first five months, we can mostly thank the government's 50 percent purchase tax cut on vehicles with engine displacement of 1.6 liters and below. 

Some automakers now fear the policy's market stimulating effect will taper off. They are lobbying the government to expand its coverage.  

The government should not listen to them. The domestic economy has improved, so it is time to reduce government intervention and let the market decide what is needed and who can survive amid competition. 

When the development of an industry is disrupted due to external shocks, government stimuli are needed to put it back on track. 

The global downturn hit China's car market hard in the final quarter of last year. Total unit sales dropped by 8 percent year-on-year in the period, after growing at an annual rate of more than 10 percent for a decade.  

January's tax cut was a timely measure. Passenger vehicle sales regained growth; rising 15 percent in the first five months over the same period a year earlier to 3,000,580 units, according to Automotive Resources Asia (ARA), a unit of J.D. Power. 

But the tax incentive has had effects that are harmful to the long-term development of the domestic auto industry. 

As I pointed out in my previous column, one effect has been a propping up of Chinese car making's weakest players. This has slowed down much needed consolidation in a highly fragmented industry. 

A second negative result of the tax incentive has been the building of excess capacity in the micro car segment. 

Attracted by the incentive policy for small cars, a slew of automakers including Chongqing Lifan Industry Co. and FAW Haima Automobile Co. have started making micro cars.  

China now has 10 micro car makers with a total annual capacity approaching 2.3 million units. Some of them are still building factories. 

Even with the tax incentive, total micro car sales in China were only 208,337 units in the first five months, according to ARA figures. 

This means substantial overcapacity already exists in the micro car segment. 

To apply a similar tax cut to vehicles with engine size of between 1.6 and 2.0 liters, as some automakers are now appealing for, would fuel a similar excess capacity higher up in the market.   

That is why the government should avoid enacting fresh incentives to further spur auto sales. Such measures serve to distort market demand and lead to excess supply. 

Source : internet

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