China Issues Auto Stimulus Program to Boost the Auto Sector

February 4, 2010

In 2009, the Chinese government issued two important documents concerning China's policy on development of the auto industry. The first, the Program for the Adjustment and Rejuvenation of the Auto Industry, was issued in March and is discussed below. The second, issued in August and effective in September, was a revision to the 2004 Automotive Industry Development Policy, and is discussed in the accompanying CECC analysis, "China Revises 2004 Auto Policy." It is likely the Chinese government will continue to pass legislation and new regulatory measures to achieve the goals of these two documents.

Auto Stimulus Program

In March 2009, the Chinese government issued the Program for the Adjustment and Rejuvenation of the Auto Industry ("Auto Stimulus Program" or "Program," available in Chinese on the government Web site). Though the Program ostensibly was in response to the global financial crisis, Section I acknowledges that the financial crisis was merely an early trigger for the inevitable "structural adjustment" of the industry, as envisioned in the 2004 Policy. (See, e.g., the introductory paragraph and Part 4 of the 2004 Policy, available in Chinese on the Web site of the PRC National Development and Reform Commission.) The Auto Stimulus Program covers the period from 2009 to 2011 and, in a sense, is an accelerated, truncated form of auto policy. The government's "planned targets" in the Program are very detailed, with figures for growth in sales (10 million vehicles in 2009, and a 10-percent average growth over the next three years, as provided in Part 2, Article 3(i)), market share of autos with specified engine displacement (Part 2, Article 3(iii)), and percentage of vehicles that should be new-energy vehicles (5 percent, as provided in Part 2, Article 3(vi)).

The Program stipulates that the major players in the Chinese auto industry shall be reorganized into two or three large auto enterprise groups with production and sales of over 2 million units, and four to five groups with production and sales over 1 million units (Part 2, Article 3(iv)). The program also discusses the future roles of major companies in the sector, with First Automotive Works, Dongfeng Motor Corporation, Shanghai Automotive Industry Corporation Group, and Chang'an Automotive engaging in national takeovers and reorganizations, and Beijing Automotive, Guangzhou Automotive, Chery, and Sinotruk doing so on a regional basis (Part 3, Article 2).

There are several provisions in the Auto Stimulus Program concerning technology, innovation, and development of Chinese brands, including that China should "achieve independence in technology for key parts" (Part 2, Article 3(viii)), and that Chinese companies should be the "main players" in product development and should establish strategic alliances within the industry, cooperating in production, teaching, and research" (Part 3, Article 3). It is not clear whether such strategic alliances, though made pursuant to Chinese government industrial policy, would be consistent with China's Antimonopoly Law. However, the Antimonopoly Law does allow considerable discretion in the case of significant state-owned companies. (See, e.g., the Antimonopoly Law, Article 7, concerning industries in the state-owned economy and Article 15 concerning exempted monopoly agreements.) The Program strongly supports the development of Chinese proprietary brands by formulating policies for development of technology (see, e.g., Part 2, Article 3 (v) to (viii), and Part 3, Articles 3 to 6), funding government procurement, and financing channels (Part 4), and providing support for auto companies to develop their brands through "independent development, joint development, mergers and acquisitions with domestic and foreign enterprises, and other means" (Part 3, Article 6). Chinese auto companies have been working actively toward the acquisition of foreign auto manufacturers, which would allow China to acquire foreign, cutting-edge technology. According to a December 14, 2009, Wall Street Journal report, Chinese state-owned automaker Beijing Automotive entered into an agreement in December 2009 to buy Saab's technology from GM, in a deal which will allow Beijing Auto to incorporate Saab technology into Beijing Auto's own cars. According to the report, a person familiar with the deal indicated that Chinese state-owned banks will finance parts of the acquisition. In addition, listed Chinese auto manufacturer Geely has agreed with Ford to acquire Volvo. According to a December 1 Wall Street Journal report, a person close to Geely has said that Geely has lined up loans from three large Chinese government-owned banks for a possible purchase of Volvo. According to a January 20, 2010, Sina report, Geely reached an agreement with Ford in December 2009 to buy Volvo Car Corporation from Ford. These purchases pave the way for China to "leapfrog" its technological development sufficiently to build Chinese brands in foreign markets, according to a December 14, 2009, report by the Associated Press (via Yahoo!).

Part 4 of the Program provides for several government subsidies to support the auto industry, including:

  • Subsidies for farmers to buy minivans or light goods vehicles (Article 2),
  • Subsidies for scrapping old vehicles (Article 3),
  • Allocation of 10 billion yuan from the central government for development of technology (Article 9), and
  • Subsidies for a national fuel-efficient and new-energy vehicle demonstration project (Article 10).

The Program calls for a number of additional measures for various government departments, at the central to local level, to support the industry and to work to achieve the goals of the Program.

Future Developments

Reports on the growth of auto sales in China indicate that China's measures to stimulate domestic consumption are working, with sales up by 46 percent from the previous year, to 13.6 million vehicles, according to a January 12, 2010, Wall Street Journal report. The Auto Stimulus Program was set to expire at the end of January 2010, but Xinhua reported on December 12, 2009, that the Chinese government has decided to extend the program for an additional year, with some minor adjustments. There are indications that the Chinese government will continue to pass legislation and new measures to achieve the goals of these two documents. For example, the State Council issued the 2010 Measures for the Adjustment and Perfection of Economic Policy in December 2009. The measures, as reported in Chinese in Xinhua, provide in part for extension and expansion of certain subsidies and programs supporting the auto industry.