China just made it a little more affordable to buy a car. Last week, the government announced a one-year, RMB 26.5 billion subsidy program devoted to energy-efficient products. About RMB 6 billion will be set aside for fuel-efficient cars, and the remaining incentives focus on LED lighting, high-efficiency motors, and air conditioners, refrigerators, washing machines and water heaters that comply with energy saving standards.
The last time China offered subsidies on autos and appliances, in 2009-2010, there was a tremendous increase in year-over-year production. At the peak, auto output jumped 120 per cent while the production of appliances rose about 90 per cent.
While the total budget for this program is only half of what the government offered in 2009, Morgan Stanley views this move as having a “positive influence on car demand.”
China also lowered gasoline prices lately, providing a “double benefit” for Chinese car buyers.
The subsidies should be welcome in a country that has become quite the car culture. Over the past decade, the auto industry has grown substantially, accelerating from only 2 million vehicles sold in 2000 to an estimated 20 million in 2012. Over the next three years, ISI estimates that another 22 million to 30 million cars will be sold each year.
Deutsche Bank says this government action strikes “a balance between immediate growth needs and long term goals of moving from an export/investment driven economy to a more self-sustaining consumer based economy.”
In Vancouver next month, I’ll be elaborating on the effect these consumer-friendly policies have on global resources at the World Resource Investment Conference. I hope to bring back plenty of investing ideas like this one to share with you.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
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