By Michael Lelyveld
China’s government is trying to roll back a critical series of anti-pollution measures in hopes of pulling its struggling auto sector out of a slump.
On Aug. 27, the cabinet-level State Council issued a statement urging local authorities to ease restrictions on car sales in an effort to end a 14-month downturn that has stalled production after decades of growth.
Passenger car manufacturing has been dropping since last November, creating a drag on industrial production at a time of economic pressures and trade war with the United States.
Sales in August fell 7.7 percent from a year earlier, while eight-month sales dipped 12.3 percent, the China Association of Automobile Manufacturers (CAAM) said.
In 2018, sales were down 5.8 percent, marking the first annual decline in 28 years.
Car production this year through August plunged 13.8 percent. The slowdown has idled production lines, some of which opened as recently as last year.
The onset of new emissions rules has been blamed for some of the slump. But overproduction, congestion and a cooling economy have combined to halt the double-digit sales boom, following a pattern for China’s overheated industries.
At the end of 2017, China’s automakers already had the capacity to build 64 million cars annually, including new plants in progress, while sales stood at 28 million units, the official English-language China Daily reported last December.
Soaring growth rates and ambitious expansion plans have since migrated to the new energy vehicle (NEV) segment thanks to preferential policies, along with concerns that the boom- and-bust pattern could be repeated without some form of support.
NEV sales soared 61 percent to 1.26 million units in 2018, according to CAAM data. China added 1.07 million new energy cars last year, the Ministry of Public Security said in January.
According to earlier forecasts, sales of NEVs could more than double in 2019, although they remain a small fraction of the 201 million cars on China’s roads.
But so far this year, NEV sales are down, declining 15.8 percent in August and 32 percent in the eight-month period.
Despite hopes for NEV growth, the central government has responded to fears for the broader auto sector, a pillar industry that has been shaken along with the economy as a whole.
The result is the State Council’s call for municipal authorities to reverse decades of policies on car registrations that were designed to rein in the runaway sales of the pre-2018 market. The auto incentive is one of 20 measures outlined by the government to stimulate economic growth.
Seven cities, along with Hainan Island, limit car sales through license plate quotas, auctions or curbs like alternate number plate restrictions on driving in urban areas. The coastal cities of Shenzhen and Guangzhou have already raised their license quotas by up to half in June, The Wall Street Journal reported.
But other cities don’t seem eager, since the consequences of removing restrictions would be more traffic and smog.
“China’s cities aren’t controlling car use for the sake of it, but because they’re trying their best to deal with profound problems of congestion and pollution as populations and incomes rise,” said Bloomberg News commentator David Fickling.
The government’s preferential treatment for NEVs under the new policy is unlikely to help with those problems since adding more cars to the roads would only increase traffic jams, energy use, and idling emissions from fossil-fueled vehicles.
“As so frequently happens, the economy trumps other considerations such as pollution and congestion,” said Philip Andrews-Speed, a China energy expert and senior principal fellow at the Energy Studies Institute of the National University of Singapore.
Auto emissions have been identified as the leading source of smog in Beijing following the shutdown of the capital’s last coal-fired power plants and conversion to natural gas in 2017.
Earlier this month, Beijing’s municipal authorities claimed success in the war on pollution as official readings of smog-forming particles known as PM2.5 fell to a new August low of 23 micrograms per cubic meter, the official Xinhua news agency reported.
The central government’s initiative may be particularly problematic for Shanghai, which has conducted license auctions for conventionally-fueled cars since 2000, although it now issues NEV plates for free, according to China Daily.
The number of bidders in monthly plate auctions has been falling, with the price reaching about 100,000 yuan (U.S. $13,942) for conventionally-fueled cars. Although the central government has gradually phased out subsidies for NEV manufacturing, the licensing rule is effectively a discount for sales.
While NEVs have risen to nearly 240,000 in Shanghai, they still account for only about 10 percent of the cars on the road.
It is unclear what the effect would be if all auction rules were rolled back, but the central government’s goal is to boost sales, despite the potential impact.
Shanghai is also the site of electric automaker Tesla’s new factory under construction, which is designed to build 500,000 cars per year.
Electric cars and other NEVs have the advantage of reducing or eliminating pollution at the “point source” of tailpipe emissions in cities, but they can still increase fossil-fuel consumption since coal remains China’s largest source of power.
Working at cross-purposes
The government’s pressure on local restrictions appears to be working at cross-purposes with crackdowns on environmental enforcement.
The Ministry of Ecology and Environment recently announced that it had held 130 officials responsible for pollution damage following a round of inspections in six provincial regions and two centrally administered state-owned enterprises (SOEs).
Andrews-Speed raised the question of why the central government had singled out the auto industry for support.
“I guess it’s because it is one of the few consumer items for which the demand is artificially suppressed, the others being banquets and alcohol,” he said.
Since the start of the economic pressures and the trade war, the government has insisted that it will not resort to a broad stimulus program like the 4-trillion yuan (U.S. $557-billion) infrastructure package that staved off the effects of the world financial crisis in 2008-2009, leaving a legacy of pollution and debt.
Similarly, policy makers have ruled out special breaks that could reignite the real estate sector with another environmentally-damaging building boom. Official media have repeatedly cited President Xi Jinping’s dictum that “houses are for living in, not for speculation.”
But analysts have been on the lookout for policy changes in both areas as economic pressures increase and options for stimulus narrow.
“It will be interesting to see when and how the government provides a broader boost to the economy, especially through infrastructure, including real estate,” Andrews-Speed said.
As with the auto restrictions, the regulatory power over property sales rests largely with local authorities, while the central government remains wary of sweeping stimulus policies.
In late August, Xinhua quoted People’s Bank of China (PBOC) Deputy Governor Liu Guoqiang as saying that a recent interest rate reform establishing a “loan prime rate” (LPR) would not spur the real estate market by reducing mortgage costs.
“New mortgage rates for first-home purchases should not be lower than the related LPRs,” while rates for second-time buyers would be higher, the PBOC said.
The real lending rate for mortgages “would not fall, as the goal of the LPR reform is to channel more funds to the real economy, Liu said, according to Xinhua.