Consumers rush to take advantage of half-rate incentive before it expires at the end of this year

China's auto industry is achieving double-digit annual growth as consumers rush to buy small-engine cars before the expiration of the current tax cut policy, threatening market deceleration in 2017 as a side effect.

The world's largest auto market saw sales of about 2.65 million vehicles in October, registering 18.7 percent year-on-year growth, according to the China Association of Automobile Manufacturers.

October's deliveries fueled the accumulated market volume in the first 10 months to 22 million units with a 13.8 percent jump.

Passenger car sales climbed for the eighth consecutive month, at a pace of 20.3 percent monthly, to 2.3 million units as consumers rushed to buy vehicles with engines no larger than 1.6 liters to qualify for the halved tax policy that is due to expire at the end of the year, according to CAAM.

The policy halved the purchase tax to 5 percent for small-engine models and has been a driving force for the car market since October of last year, according to Dong Yang, executive deputy president of CAAM.

"The tax cut may contribute about five percentage points to the annual growth rate. The market's annual growth next year may stay at 8 percent if supported by tax cuts," Dong said.

Deputy Secretary-General of CAAM Ye Shengji anticipates a growth rate faster than 8 percent for 2016 after the market laid a solid foundation. Earlier this year CAAM predicted growth of 6 percent.

The China Passenger Car Association's Secretary-General Cui Dongshu last week predicted an even higher growth rate - around 13 percent for this year.

CAAM's subsidiary, the China Passenger Car Association, found wholesale sales of cars with engines no larger than 1.6 liters rose 26 percent in October, compared with 16 percent for those with larger engines.

Local media reported that the central government is considering an extension of the tax policy. A meeting involving several related departments was held earlier this month to survey the advice.

CAAM has joined hands with carmakers in lobbying the government for an extension of the policy, with some suggesting alternative policies including raising the tax rate on small cars to 7.5 percent.

One report said the Ministry of Finance would lower the tax rate to 1 percent for cars below 1 liter, but collect more tax on gas guzzlers. However industrial insiders say tax reform won't be put in place before 2017.

Dong notes: "The auto market growth rate might slow down to 3 percent if the policy is not continued and the purchase tax on small cars is increased back to 10 percent."

On the other hand, even if the tax cut policy were extended for another year, the positive effect on the market would diminish, because many customers made their purchases this year to utilize the tax break, says Jia Xinguang, a senior analyst with the China Automobile Dealers Association.

Considering the diminishing benefits of the purchase-tax cut, Fitch Ratings predicts that the growth pace of Chinese passenger vehicle sales will decelerate to mid-single digits in 2017.

Fitch Ratings also says the strong sales momentum in sport utility vehicles is expected to continue at a slower speed in 2017, with rising penetration in lower-tier cities and required upgrades being the ongoing drivers.

"The market share of SUVs is likely to converge with that of sedans, as consumer preferences continue to shift amid increasing product launches by both Chinese and joint venture brands," Fitch said in the report.

The SUV segment profit margin is projected to normalize in 2017, owing to a rapid increase in product offerings, leading to more aggressive pricing and diluted sales volume per model, after the segment's sales growth reached a significant 45.6 percent in the first 10 months this year.

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