Government’s subsidy for vehicle trade-in

　　The government’s subsidy for vehicle trade-in, formulated in 2009, allowing car owners to trade in their old cars for new ones, will come to an end. However, we still can’t neglect its significance. What we should do now is to draw lessons from the past and intensify efforts to stimulate the next round of the vehicle trade-in subsidy policy. As for the time limits of the subsidy, its foundation and conditions in Chinese market, along with its difficulty, should be taken into consideration. Furthermore, as our government is able to fully support the policy in finance, the subsidy should not be adopted as a short term incentive, like Europe and America, but a long run policy. We could not make any adjustment until it goes smoothly in the market.

　　i. The government’s subsidy for vehicle trade-in has played a significant role.

　　The vehicle trade-in policy, formulated by the State Council, is expected to boost domestic demand. On one hand, vehicle trade-in could bring along the growth of domestic demand, create more jobs, and promote steady and fast economic development. On the other, it could reduce the environmental pollution through highly energy utilization, propel the development of the recycling economy, the energy conservation and emission reduction.

　　1. To boost consumption

　　The subsidies for vehicle trade-in could directly boost consumption. Especially for those old commercial and industrial vehicles in some big or medium-sized cities, they would consider more about the cost and benefits. Thus, encouraging the subsidies for vehicle trade-in could be helpful to replace the old commercial and industrial vehicles.

　　2. To boost the resource recycling

　　We could recycle all kinds of resources by means of replacing old vehicles. China needs to strengthen the development of the recycling economy. There are many scrap resources amongst scrap vehicles, including scrap steel, scrap non-ferrous metal, scrap plastic and rubber. We could promote the recycling of the replaced vehicles and dismantling through normal operation.

　　3. To create more jobs

　　As auto industry owns high technology and a long auto industrial chain, the encouragement of vehicle trade-in could not only bring along the steady growth of auto industry, but boost other sectors development, such as marketing, logistic, and after-sales services.

　　The vehicle recycling and dismantling is a labor-intensive industry. Thus, the vehicle trade-in policy could not only boost the development of scrap vehicle recycling and dismantling, but also create more jobs and maintain the employment stable.

　　4. To improve the environment

　　One of its important content is to encourage high-emission vehicles to be replaced in advance. High-emission vehicles replacement ahead of time plays a significant role in preventing from the pollution of vehicles, improving the quality of the environment and people’s healthy status.

　　ii. We should strengthen the preparation for the vehicle trade-in policy.

　　Measures on the Implementation of Vehicle Trade-in have been officially issued on August, 10th, 2008. Compared with other policies, the subsidy policy could not achieve a good result after launched for 3 months. The subsidies for vehicle trade-in are comparably low. Compared with other countries, the subsidies are the lowest in China. Since the subsidies are lowest, car owners would prefer to sell their old cars. What’s more, the subsidy policy achieved no good result as well as the scrappage scheme, owing to its inadequate implementation, and further to create more difficulty for carrying forward the policy. Unfortunately, the hope that subsidies totaled 5 billion Yuan was gone. It was until the end of 2009 that the government only had provided 2 percent of the total of subsidies to car owners.

　　According to the new 2010 auto policies, issued by the relevant ministries of the State Council on December, 9th, 2009, the subsidy for vehicle trade-in is raised to 5000 and 18000yuan, effective from Jan,1th, 2010. After the adjustment, the new subsidy owns more competitiveness than the previous one, and is closer to the price of second-hand vehicles.

　　The government has made another adjustment to the subsidy policy for trade-in vehicles within 30 days, on Jan, 18th. The Ministry of Commerce, along with the Ministry of Finance, jointly issued Notice of the Ministry of Finance and the Ministry of Commerce on the Approval of Simultaneously Enjoying the Subsidy for Exchanging Second-hand Vehicles for New Ones and the Vehicle Purchase Tax Reduction Policies, effective from Jan, 1, 2010. According to the notice, vehicle owners who satisfy the prescribed conditions may simultaneously enjoy the subsidy for exchanging second-hand vehicles for new ones and the policy on reducing the vehicle purchase tax on passenger cars with 1.6L or lower displacement. The move is to further improve the policies on exchanging second-hand vehicles for new ones and realize the goal of expanding consumption at the same time when saving energy and reducing emission. The central government has showed its decision and confidence to fully implement the policy.

　　iii. Problems exist in the vehicle trade- in policy.

　　1. Poor conditions of the old vehicle recycling and dismantling could create more trouble for the implementation of the policy.

　　In the international auto market, scrap vehicle recycling and dismantling result from the cooperation of multi-sectors and a large project behind the auto sector. It plays a great role in protecting the environment, saving energy, expanding employment, increasing people’s revenues, and reducing vehicles’ costs. However, the only designated recycling discarded automobile dismantling enterprises are strictly controlled by the government, and have a monopoly on this industry. The present ways of operation could make the designated old vehicle dismantling enterprises the group of vested interests. In the process of recycling, they could recycle those scrap vehicles with a lower price, and gained huge profits. However, those enterprises didn’t invest any technology or new equipment in the process of environment conservation and reproduction. Also, there is no division labor between different sectors. This phenomenon seriously disturbs the normal competition in this sector.

　　2. Poor operation of the recycling and dismantling industry makes a big obstacle to the implementation of the policy.

　　The policy only intensifies car owners’ responsibilities that they should hand in their scrap vehicles to the relevant department, but provides insufficient subsidies for them. Further more, car owners have to follow a series of complicated processes and satisfy many prescribed conditions. So they would rather to sell their old cars, but leave them to the designated recycling department, owning to its simplicity and high profits. According to the information, as same as ten years ago, the purchasing price of scrap vehicles still remains unchanged, at 350yuan per ton, while the scrap recycling enterprises would purchase scrap metal at around 2000yuan per ton. Even the illegal dismantling factories would offer 3000 to 5000 Yuan to purchase a medium-sized truck, weighting dead load of 4 tons. And the car dealers would offer up to ten thousand Yuan in the second-hand vehicle market. Facing the wide gap of the purchasing prices, the shrinking number of vehicles replacement speaks for itself.

　　3. There is a great difference between government’s expected goal and the current situation.

　　The number of vehicles is 0.2 billion units in the United States, and the number of scrap vehicles could annually reach 12million units, with 6% of scrappage rate every year. Last year, the number of vehicles was about 60 million units in China. Through normal ways, the number of scrap vehicles was 0.5 million units with only 1% of scrappage rate. Therefore, there is an enormous difference between the expected number of scrap vehicles and the current situation. The United States has initially provided 1 billion dollar as the subsidy for vehicle trade-in, and then added another 2 billion dollar for dealing with the huge boom in the vehicle trade-in. However, China only provided 5 billion Yuan to subsidize vehicle trade-in, but expected to replace 1 million old vehicles. That is to say, car owners could be provided a lower subsidy for single vehicle. The number of auto replacement in China is 3 times of that of the United States, but the subsidies, offered by Chinese government, take up not more than 25% of subsidies in the United States. So, it’s not hard to predict that the expected goal of auto replacement can’t be achieved.

　　4. The policy discriminates against vehicles with small displacements.

　　It was a good thing to raise the subsidy for auto replacement in the beginning of the year. But there are some details discriminating against vehicles with small displacements in the subsidy policy. They are contrary to the policy which boosts the development of vehicles with small displacement, and promotes the environment conservation and emission reduction.

　　It’s not reasonable to standardize 1.35L as the auto replacement. The new policy providing different subsidies for passenger cars according to their different engines will propel the smooth implementation of the auto replacement. The subsidies for vehicles with engines of 1.35L could reach 18000yuan, up 12000yuan. The subsidies for vehicles with engines of 1-1.35L could achieve 10000yuan, increasing 4000yuan. The vehicles of engines of more than 1.35L could be provided 8000yuan, while those of less than 1L provided only 6000yuan.

　　Purchasing vehicles with small displacement could be considered as a behavior to protect environment and save energy, but not to be discriminated. Especially, the subsidy policy should not discriminate against vehicles with small displacements, which could save more oil. Purchasing vehicles with small displacement played a significant role in the society, and made great contribution to the energy conservation and emission reduction from the past till now. This purchasing behavior should be encouraged, but not be prejudiced. Also, it owns respect from the government subsidy for auto replacement.

　　We never see any discrimination against vehicles with small displacement in the auto replacement policy in the European and American. However, it will be dangerous for China to expand this discrimination to the subsidy policy of vehicle trade-in. In my opinion, whether a policy is scientific or not, it depends on its criteria and the social effect. Since private vehicles are prevailing now, the policy should not build any threshold of different vehicle emissions.

　　The near-sighted standards will have a short life. The international policy is orientated to energy conservation, emission reduction, and encouraging vehicles with small displacements, but the new subsidy policy of vehicle trade-in not only discriminated against vehicles with small displacements, but also simply encouraged old vehicles with large displacements. It could lead to consumers refusing to believe in the encouragement of vehicles with small displacements. It’s not scientific to formulate such subsidy policy to discriminate against vehicles with small displacements. And I believe the policy could not last a long time.

　　4. Will the policy expire or just simply continue?

　　The subsidy policy of vehicle trade-in will expire in the end of this month, which is with the highest cost, but the worst effect recently. It’s not wrong with the policy itself, but the relevant policies. At first, second-hand vehicles mainly come from car rental companies. According to the policies, rental cars must be new ones within 3years. Since car rental companies are the biggest clients of those automakers, they could not only purchase cars with a favorable price, but also discount the old vehicles as down payments to purchase vehicles. In China, those car rental companies also purchase second-hand vehicles for rental. However, they are not the main source of second-hand vehicles, but become the clients to snap up second-hand vehicles. Thus, it could lead to the scarce of second-hand vehicles, and the doubled price compared with the United States. In addition, the designated recycling discarded automobile dismantling enterprises purchase vehicles with a much lower price, and there is no compulsory provision of replacing high-emission vehicles. Nevertheless, even the oldest ones could be sold as second-hand vehicles, and the price is way higher than that of the recycling and dismantling enterprises’ offers. Even the oldest vehicles could pass the annual inspection due to the relaxed management. Those above reasons could make the subsidies for vehicle trade-in get half the result with twice the effort. The policy should expire, if it can not be improved effectively. According to the current conditions, even if the policy doesn’t continue, it could not affect the market at all.

　　iv. How to improve and intensify the government’s subsidy for vehicle trade-in

　　1. Make adjustment to the unreasonable policies which restrain vehicles with small displacements.

　　It’s not reasonable to previously standardize 1.35L as the threshold of different subsidies for passenger vehicles. In the 90’s, people purchased vehicles with small displacements at a high price. The current subsidies are way lower than those of engines of more than 1.35L. The policy is not reasonable, so the long-term and normal standard should be established.

　　2. Encourage automakers and vehicle dealers to participate in vehicle trade-in.

　　If dealers could participate in the vehicle trade-in, and deal with those complicated processes, then it would lower the burden of car owners, who choose to replace their old vehicles. The present problems are the complicated processes and not enough branches. If vehicle dealers could be encouraged to participate, then it will boost the implementation of the subsidy policy and enable automakers to make greater contributions to the vehicle trade-in. At the same time, consumers could be provided a fast and convenient service and gain more benefits.

　　3. Intensify the subsidies for vehicle trade-in.

　　We should intensify the subsidies for vehicle trade-in, and consider the hidden costs for consumers, such as the time of filing replacement, and the capital deposition. The purchasing price of old vehicles should be raised and more and more automakers should be encouraged to participate in the vehicle trade-in, so that the loss of old and scrap vehicle resources and the poor conditions which didn’t follow the normal process could be improved. Generally speaking, the total amount of subsidies should satisfy: the central government subsidy+ the local government subsidy + the automakers’ self subsidy+ the purchasing price of old vehicles≧ the price of second-hand vehicles + the capital cost. Thus, the every process of the auto replacement could run smoothly and the expected goal of the new subsidies could be achieved.

　　4. Intensify the reproduction of auto parts.

　　According to sources, the Development and Reform Commission, along with the relevant departments, will compile the Development Planning of the Remanufacturing Industry, and formulate Auto Parts Reproduction Regulations in order to solve the following problems: the quality management of remanufacturing enterprises, the registration of remanufacturing engines, and the management of remanufacturing symbols. The Development and Reform Commission, along with the relevant departments, will make adjustment to The Measures for Administration of Auto Replacement to eliminate the obstacles to preventing the development of the remanufacturing industry in terms of law. And they will also compile the catalog of remanufacturing products to formulate the preferential taxation of the listed products, and encourage the incentives of remanufacturing products. Subsidies for vehicles trade-in should be connected with the fast development of remanufacturing auto parts, so as to arouse the enterprises’ initiative of participating in vehicle trade-in. Therefore, the recycling of auto replacement should be closely connected with the reproduction in order to stimulate the virtuous circle of vehicles trade-in. (Translator: Qinghua: Serena)

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