VW, PSA shares drop on fears that China car subsidies may end

[NINETY EIGHT REGENCY]

VW, PSA shares drop on fears that China car subsidies may end

December 9, 2010 11:12 CET

SHANGHAI (Bloomberg) -- Shares of Volkswagen AG, PSA/Peugeot-Citroen SA and Continental AG dropped after an automobile industry association said Chinese incentives for buying cars will not be extended and will likely expire at the end of the month as planned.

“Last year, we wrote to the government requesting an extension for the tax incentives; this year, we don't think it's appropriate,” Xiong Chuanlin, vice secretary general of the China Automobile Industry Association, said today at a briefing in Beijing. “Hence, I doubt the tax cuts will continue.”

Preferred shares at Volkswagen, whose largest market is China, plunged as much as 7 percent, PSA declined as much as 4.8 percent and Continental dropped as much as 6 percent. China is an expanding market for PSA and Continental.

Success story

“We are aware that the supporting measure of the government for the sales of cars with 1.6-liter or smaller engines could fade out at the end of this year,” Christine Ritz, head of VW investor relations, said in an e-mailed statement. “China is a success story for Volkswagen and there is no reason why this should change.”

Stimulus measures in China, the world's biggest auto market, including a consumption-tax rebate for smaller vehicles, subsidies for rural car-buyers and incentives to trade in older models are all due to expire at the end of the December. Deliveries in China last month surged 29 percent.

“Consumers who expect the stimulus policies to be discontinued next year are bringing forward purchases before time runs out,” said Yu Bing, an automotive analyst at Pingan Securities Co. in Shanghai. “There is little reason to support the extension of the tax rebate and vehicle trade-in policies, given robust industry growth.”

VW, Europe's largest carmaker, dropped as much as 9.05 euros to 120.20 euros and was down 5.8 percent as of 12:04 CET in Frankfurt trading. Continental was down 5.3 percent. PSA traded down 4 percent in Paris. The Stoxx 600 Automobiles and Parts subindex slumped as much as 2.8 percent today.

The Chinese government cut a 10 percent tax on car sales to 5 percent in 2009 and then raised the rate to 7.5 percent this year. The rate is set to go back to 10 percent beginning in 2011.

China Nov. sales surge to record

Sales of passenger cars including multipurpose and SUVs increased to 1.34 million in November, higher than the previous record of 1.32 million in January, CAAM said. The pace of growth was the fastest since April.

Total vehicle sales including trucks and buses surged to 1.7 million, 27 percent more than a year earlier, the association said. For the 11 months through November, total vehicle sales rose 34 percent to 16.4 million.

“The subsidy's target was to boost sales and help the auto industry recover from the crisis in 2008,” said Marvin Zhu, a senior analyst at researcher J.D. Power & Associates in Shanghai. “Growth now is far beyond the government's target.”

Small-car impact

The removal of tax cuts will have the biggest effect on small car sales in China, said Zhu, who expects sales growth of small cars to be cut by as much as 5 percent in 2011 after the tax incentives end.

The stimulus measures helped China's industrywide vehicle sales jump 46 percent last year to 13.6 million, surpassing the United States for the first time to become the world's largest national automobile market.

Total vehicle sales in China may rise to 18 million this year, compared with an earlier forecast of 17 million, Xiong said at today's briefing. Sales next year will rise at least 10 percent, exceeding the country's forecasted economic growth, Xiong said.

“Car sales usually exceed GDP growth,” he said.

While demand growth may slow in 2011, carmakers such as General Motors Co. and Ford Motor Co. continue to add new models.

GM introduced Baojun, a new “affordable” brand, on Nov. 22 to grab share from local automakers such as BYD Co. and Geely Automobile Holdings Ltd. and will begin selling the line next year. Ford opened 40 dealerships in China on Nov. 25 and plans to add a further 26 by year end.

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