A BMW M235i on display during the 16th Shanghai International Automobile Industry Exhibition in Shanghai. Picture: AFP PHOTO/WANG ZHAO
A BMW M235i on display during the 16th Shanghai International Automobile Industry Exhibition in Shanghai. Picture: AFP PHOTO/WANG ZHAO

Beijing — China’s top economic planning body is proposing cutting the tax levied on car purchases by half, according to people familiar with the matter, as the impact of the trade war and a slowing economy drags on demand in the world’s biggest car market. Shares of carmakers like Volkswagen and Daimler surged.

The National Development and Reform Commission (NDRC), which also acts as China’s top regulator, submitted a plan to a group of key policy makers to cut the purchase tax to 5% from 10% for passenger vehicles with engines no bigger than 1.6l, the people said, asking not to be identified because the information is not public. No decision had been made on implementation, they said.

Volkswagen, which last year sold about 39% of its vehicles in China, rose 6% to €145.04, the biggest intra-day gain in more than two years, and traded up 5.3% at 11.12am in Frankfurt trading. BMW and Mercedes-Benz maker Daimler, which counts China as their biggest market, also rose sharply.

The NDRC did not immediately respond to a fax seeking comment. Cars of that engine size accounted for some 70% of the total number of passenger vehicles sold last year, according to the China Association of Automobile Manufacturers.

Chinese car sales are on track for their first annual drop in two decades as the trade row with the US weighs on growth and fuels losses in the stock market. After racking up record sales over the past few decades as China’s emergent middle class bought their first cars, consumers are retreating from big-ticket buys, a pullback exacerbated by the phasing out of a car purchase tax rebate.

The decline is being felt by the world’s top carmakers, with Volkswagen to Ford Motor on the back foot as demand in what has become a key market fizzles.

Should the tax-cut plan go ahead, it could be seen as the latest effort by China to support the $12-trillion economy, which has slowed this year amid the ongoing trade friction. In recent weeks, policy makers have tried to calm ructions in the stock market and acted to bolster private businesses by supporting bond issuance. Banks’ reserve-requirement ratios have been cut four times this year as a way of encouraging them to lend.

China put the purchase-tax incentive in place in 2015, and reduced the rebate last year before phasing it out at the start of 2018.

Passenger-car purchases by dealerships declined 12% to 2.06-million units in September, according to the car manufacturers body. For the first nine months of this year, the industry eked out a sales gain of just 0.6%, and the association said the fourth-quarter outlook was challenging.