From: Reuters
Published August 14, 2008 10:03 AM

China raises tax on big cars, impact seen small

China said on Wednesday it would raise taxes on large passenger vehicles and cut the tax on small cars from next month to cut pollution and fuel use.

But the policy may only have a limited impact on boosting fuel efficiency in the world's second-largest oil user, as majority of the cars will be spared the tax hike as Beijing seeks to prevent more damage to an already slowing auto market.

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The consumption tax on cars with an engine size of more than 4 litres will double to 40 percent, the Ministry of Finance said in its website (www.mof.gov.cn), only days after official data showed China's car sales growth in July fell to its lowest in two years.

For cars with an engine size of between 3 and 4 litres, the tax will rise to 25 percent from 15 percent. The tax on small cars with an engine size of 1 litre or less will fall to 1 percent from 3 percent now.

But cars with an engine size of between 1 and 2.5 litres, which account for nearly 90 percent of the world's second-largest car market, will have their tax rate unchanged.

"The government does not want to see a slump in the car market. The policy is just a symbolic gesture to raise public awareness in a high oil-price year," said Yi Junfeng of Changjiang Securities.

Cars with an engine size of 3 litres or above make up less than 1 percent of total sales, according to Qin Xuwen, a senior industry analyst at Orient Securities.

Yang Fuqiang, the Beijing-based head of U.S. Energy Foundation which advises the government on fuel efficiency, said China is taking a more proactive role than the United States, the world's top energy user.

But a tougher and more effective tool to curb fuel use would be to let pump prices rise, Yang said.

U.S. crude oil hit a record high above $147 a barrel in mid-July, capping a six-year rally which has been due in large part to robust Asian demand.

But Beijing caps the prices state oil firms can charge for fuel, keeping domestic prices well below international rates.

Global crude prices have tumbled more than $30 a barrel in the past month on increasing signs of weakening oil demand as economies slow.

Beijing surprised markets by raising gasoline and diesel prices 17-18 percent in June and any further hike was likely to further weigh on global crude prices, analysts said. Some speculate a further hike in fuel prices could come before the end of the year.

"If China decides to raise prices by another 1,500 yuan per tonne to close the gap (with international markets), oil could hit $90. If China tops that with fuel tax, oil could dive to $70, $80," said Yang.

Beijing has repeatedly vowed to introduce a fuel tax to be charged on the pumps to replace road tolls.

China, trying to make its economic growth greener, has set a goal of reducing energy intensity by 20 percent between 2006 and 2010.

But for now, the country's big-spending middle-class and government departments that are the main buyers of big cars are unfazed by pump rates.

After the June hike, gasoline prices are about 20 percent below those in the U.S. and diesel is still half what it costs in Singapore (Reporting by Langi Chiang and Fang Yan; Additional reporting by Chen Aizhu; Editing by Lincoln Feast)

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