Tax reform coming to Beijing; central planning running amok in auto sector

The switch from a revenue tax to a value-added tax (VAT) will lower tax rates for firms who are eligible for the pilot program. Beijing follows Shanghai in this reform, with the goal to spread it nationwide.

138,000 companies are eligible for this first stage (based on their industry sector), about 53% of the firms operating in Beijing. It will save firms a total of about ¥16.5 billion, with ¥7.2 billion coming out of Beijing local government revenues. The change to a VAT will eliminate double taxation and small businesses will see their tax rates fall from about 5% to 3% under the VAT, but larger firms will see an increase in the tax rate from 5% to 6%. Deductions will mean that even large firms will see their taxes reduced.


While tax cuts are good news for China's economy, we still see cases of central planning running amok. The latest two examples come from the auto sector. First up, Beijing's lottery system to restrict auto ownership. Background info: Beijing has a lottery to distribute new license plates. If you do not have a Beijing license plate, you are restricted in your driving and you cannot buy a car in Beijing. The number of people participating in the lottery peaked at about 800,000-900,000 people, but it surged in the latest round to more than 1,070,000. With only 17,600 licenses available, the odds are more than 50:1 against. See: 购车摇号申请超百万

Car lottery scheme aids non-local buyers
Beijing auto dealers are colluding with local car plate lottery winners to charge non-local car buyers who are barred from purchasing a vehicle in the city without winning the lottery.

The scheme has become popular as certain car models can be bought at cheaper prices in Beijing than in other provinces and cities.

A manager, surnamed Yang, from Beijing Hengyi Zhongbao Automobile Company in Fengtai district, said that out-of-town buyers will pay around 30,000 yuan ($4,710) to "rent" a person's registration, usually a Beijinger who already owns a car and does not need another.

"Without winning the car plate lottery, non-local car buyers are not allowed to buy Volkswagen vehicles here, which are much cheaper than in other cities," said Yang.

For example, certain models sell in Beijing for around 58,000 yuan less, he said.

But after purchasing the car, buyers will then give back the registration, and re-register the vehicle in their hometown.

Half of the payment goes to the original holder of the registration, and the other half is to pay for all the fees and paperwork. Once the registration has been handed back, it can be re-used multiple times, said Yang, but only within six months, at which point the registration expires.

Beijing started issuing car license plates via a lottery system from January 2011, aiming to ease traffic congestion.

Finally there is Xian: Xi’an puts draft policy to control number of new car sales on hold
According to the draft, the Xi'an government would control the number of cars in the city and take measures to reduce traffic flow on the roads in order to ease the city's congestion.

If the order is carried out, Xi'an would become the fifth city in China to control the number of new cars, following Shanghai, Beijing, Guiyang and Guangzhou.

Guangzhou announced a quota system for new car ownership in June. Beijing adopted a lottery system last year to allocate license plates for new cars. Shanghai began an auction system for new license plates in 1994, and the lowest bid for a plate reached 64,000 ($10,074) yuan by 2012.

However, these policies have failed to make an obvious improvement in Xi'an despite a significant drop in car sales, Jia Xinguang, an independent automobile analyst in China, told the Global Times Thursday.

Guangzhou saw car sales of 330,000 in 2011, which will be cut to 120,000 in 2012 based on its quota system. Beijing added 174,000 new vehicles in 2011, much lower than the 810,000 sold in 2010.

"If many other cities follow such policies, the whole automobile industry would be impacted," Jia said.
All of these cities follow the same path. They encourage auto sales to boost the economy. Then they have congestion problems and pass restrictions on car purchases. With the economy slowing, however, there's fear that restrictions will severely impact the economy.

This is a typical policy cycle for central planning. Do something, it causes massive unintended consequences, then enact a counter-policy, itself causing massive unintended consequences. Repeat. In this way, the government is always seen to be doing something, even if it mostly consists of cleaning up its own messes.

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