China’s Bid to Expand Caps on Car Sales Backfires

BEIJING – The Chinese government’s plans to extend license-plate purchase restrictions from major to smaller cities may have fallen at the first hurdle amid an irate public and angry domestic auto makers, which fear the measures may hurt sales.

Speaking at an industry forum in Beijing this month, Shi Jianhua, deputy secretary-general of the China Association of Automobile Manufacturers, says the plans to extend restrictions to Chengdu, Chongqing, Hangzhou, Qingdao, Shenzhen, Shijiazhuang, Tianjin and Wuhan could result in members losing 400,000 units of sales each year.

The eight cities accounted for 1.8 million vehicle deliveries last year, or about 13% of China’s total car distribution, according to research by the LMC Automotive consultancy in Shanghai.

The policy is part of an effort led by new Premier Li Keqiang to improve air quality in the country, but he faces the difficult task of balancing China’s need for consumption-led economic growth with calls for a cleaner environment.

The central government is asking municipal authorities to restrict traffic growth by limiting the number of plates they issue to local drivers, and to limit registration to vehicles meeting a minimum environmental standard.

But the local authorities are sensitive to public opinion, and the city of Shijiazhuang already is balking at curtailing license-plate purchases. Officials in the capital city of northern Hebei province, home to about 10 million people, are reconsidering their actions in light of widespread public opposition.

In the first half of the year, Shijiazhuang distinguished itself by failing to record a single day of meeting the government’s clean-air standard while suffering 40 days of serious pollution. This prompted the local government to respond in June by announcing a campaign to tackle air pollution.

The Shijiazhuang plan called for restricting auto sales to 100,000 units this year, and then to 90,000 annually starting in 2015. Additionally, new vehicles sold in the urban area after Jan. 1, 2014, would be required to comply with the government’s latest auto-emissions standard.

But these rules proved wildly unpopular among consumers believing their right to choose was being curtailed. “Shijiazhuang tried to issue (the new rules) in June, but the local government had to withdraw it as there were so many complaints from the public,” says Aaron Qi, a Hong Kong-based auto analyst with Macquarie Securities.

Consumer complaints joined the chorus of opposition from Chinese auto makers such as Great Wall, which has its headquarters in the Hebei province city of Baoding.

“The policy will seriously affect the development of Chinese-brand cars,” Shi, of the auto makers’ association, says in a statement. “Its effectiveness in controlling traffic congestion will be very limited and it is also not conducive to energy conservation.”

License-plate restrictions are in effect in Beijing, Guangzhou, Guiyang and Shanghai, but each city has a markedly different policy and consequently varying degrees of impact on local sales.

Since Beijing introduced its lucky-draw plate-allocation policy, average car prices have jumped 88%, Qi says. “People want to buy more expensive cars since it's so hard to get one, and the market share of cars smaller than 1.6L dropped 17 percentage points,” he says.

Demand for cars with larger engines tends to support Shi’s assertion that the plate restrictions do little to promote cleaner air.

In Guangzhou, which in June 2012 introduced a hybrid of the lottery conducted in Beijing and an auction system that Shanghai operates, sales of local GAC Group cars have been severely dented by the policy, according to Chinese-language media reports.

Deliveries of cars produced by GAC’s joint ventures with Honda and Toyota both have fallen significantly behind the national average of about 10% growth, as the Japanese auto makers recover from production losses stemming from a territorial dispute between China and Japan dating to last September. Sales of other Chinese auto makers’ low-end brands also have declined, according to a July 15 report in the Chinese-language First Financial Daily.

“Moreover, in the first five months of this year, Guangzhou automobile-manufacturing output fell 5.5% on the year,” the report says, citing Guangzhou Academy of Social Sciences warnings that the industry in fact would be a drag on the city’s growth this year.

Such pronouncements and China’s economic cooldown support a growing consensus that the introduction of license-plate restrictions may be postponed, or replaced by less-stringent measures.

“China’s slowing economy is a more immediate concern, so we do not believe that the purchase restrictions will be implemented in the short term,” investment bank North Square Blue Oak says in a note to clients following the central government’s plan to limit car sales in more cities.

“Autos play a key role in boosting domestic consumption, and they continue to receive policy support in terms of ongoing encouragement of consumer credit.”

Industry analyst Qi predicts sales probably will rise in the near term as consumers rush to make purchases ahead of potential restrictions. But he also expects the government policy ultimately will be enforced in no more than one or two of the eight targeted cities.