China’s record auto sales streak may hinge on tax cut

China is set for a 26th straight year of record auto sales after surpassing last year’s tally in November, fueled by a cut in a levy benefiting a large swath of the industry. The lurking concern is that the streak may end if the tax break isn’t extended.

With three weeks left until the tax break expires, the government has yet to indicate whether it will extend the incentive. Consumers bought 21.1 million passenger vehicles in the first 11 months, more than the 20.6 million units for the whole of last year, according to the China Passenger Car Association. The last time the Chinese car market shrank was in 1990.

The health of China’s auto market, now the biggest for companies including General Motors Co. and Volkswagen AG has taken on added importance in the wake of the election of Donald Trump. The U.S. president-elect campaigned on a promise to toughen America’s trade stance with Mexico and Japan, and has been critical of China’s currency policies and military build-up.

“China is a vital market for automakers around the world and policy uncertainties here are the biggest challenge for those counting on this demand,” said Yale Zhang, managing director at researcher Autoforesight Shanghai Co. “The tax cut worked like a giant commercial spurring consumers to buy. If it isn’t extended, we’ll most likely see a 2 percent decline or no growth next year.”

Buyers of small-engine cars in China continued to bring forward their purchases to qualify for the tax cut. The levy on cars with engine capacity up to 1.6 liters was reduced by half in October 2015 to 5 percent after vehicle sales slowed with the economy. Buyers of super-luxury cars also rushed to beat a 10 percent additional tax imposed this month to combat conspicuous consumption and promote more efficient vehicles.

“As long as the government doesn’t say anything about carrying the tax cut beyond this year consumers would assume it will run out this month and act on that assumption,” said Huang Xiaowei, an analyst with Shenzhen-based WAYS Consulting Co.

Retail auto sales in China surged 20 percent to 2.42 million units in November, led by demand for sport utility vehicles, according to PCA data. The sustained demand for small-engine cars has helped clear inventory at dealerships, according to the China Automobile Dealers Association.

Geely Automobile Holdings Ltd. posted the fastest sales growth among major local automakers with its deliveries almost doubling to 102,422 units in November, while Guangzhou Automobile Group Co. and Great Wall Motor Co. recorded sales increases of more than 30 percent last month.

Ford Motor Co., which Trump threatened with a 35 percent tariff on vehicles it builds in Mexico and ships back to the U.S., sold more than 1 million vehicles in China in the first 11 months. The Dearborn, Michigan-based automaker now counts China as its biggest foreign market and sees the full-size luxury sedan market there growing 60 percent by 2025.

“Ford is gaining more momentum in China each month and we are on pace for a record year in China,” Peter Fleet, Ford’s Asia Pacific sales vice president, said in a statement. “We are seeing increasing demand across our lineup, particularly our full family of SUVs.”