Chinese car buyers meet higher gas prices and new taxes.

Discussion in 'In the News' started by xcel, Apr 2, 2006.

  1. xcel

    xcel PZEV, there's nothing like it :) Staff Member

    "Prices go up at midnight."

    Michael Dunne - Detroit News - Auto Insider - April 02, 2006


    Shanghai - Last Saturday evening Li Ningsheng, a 47 year-old engineer, received a phone call from a close friend: "Get over to the gas station in a hurry,” he said. “Prices go up at midnight."

    Mr. Li drove his Volkswagen Jetta to the closest China Oil station on the outskirts of Beijing. He got stuck behind a long line of cars, but was able to fill-up before the clock struck twelve.

    When Saturday turned to Sunday, gas prices climbed 10 percent to $2.19 a gallon. Li said later: "Prices were high to begin with. It's getting scary."

    Now that China has become the world's largest importer of oil after the United States, regulators in Beijing are finding it necessary to pass more of the cost onto consumers.

    China’s first move was to raise fuel prices, a process that began in the first quarter of last year. In the twelve months since the initial hike, gasoline prices have increased twenty-two percent.

    For most Chinese, even a ten percent increase is a shock. That is because a typical car owner’s fuel bill as a share of total income is many times higher than his counterpart in America would experience.

    China Gas and Diesel Prices Per Gallon
    Fuel Type/Period  Q1 2005  March 25, 2006  Today
    Gasoline #93      $1.79    $2.01           $2.19
    Diesel            $1.74    $1.90           $2.05
    Source: Chinese Government Statistics.

    Mandarins in the central government set the fuel prices. Many of them would have liked to raise gasoline and diesel prices even higher.

    But China’s top leadership feels that a hasty price increase could generate unrest in the hardscrabble countryside. Farmers use copious amounts of diesel fuel to power tractors and to run generator sets. A sharp increase in diesel prices would cut directly into the family budget for basic necessities like clothes and food.

    Mao Zedong was only the most recent of a long line of Chinese peasants to lead revolutions when conditions in the rural areas grew unbearable.

    A second tool to control demand for oil is taxes. On April 1st, 2006 China will enforce a new set of excise tariffs on cars.

    Rates will range from three percent for cars powered by engines of less than 1.5 liters to twenty percent for cars with 4-liter engines. (The current top excise tax is eight percent).

    Clearly, the new tax schedule is designed to encourage people to buy smaller cars. In fact, the April-effective three percent excise tax on cars with engines between 1.0 and 1.5 liters is two percentage points lower than the current rate.

    All things being equal, Chinese consumers prefer large cars. Big sedans project clout and prestige. Nonetheless, the phenomenon of drivers like Mr. Li lining up at the station to beat a 10 percent price hike is a good indicator of Chinese cultural priorities: Face is important. But money is king.

    China’s policy-makers understand those priorities. In the months ahead, look for Chinese consumers to keep their innate desire for big cars -- but to purchase more of the smaller, gas-sipping variety.
  2. tigerhonaker

    tigerhonaker Platinum Contributor

    Sounds like from reading this that the Peasant in China is going through the same thing that the working class here in the USA is. :(
  3. AZBrandon

    AZBrandon Guest

    It sounds like their economy is perched upon the notion that price controls can magically insulate them from reality. If the only way they can feed the nation is by providing cheap diesel to farmers, at the cost of the government having to pick up the slack, then that money is coming from somewhere. Price fixing never works long-term on account of the fact there's no such thing as a free lunch.
  4. xcel

    xcel PZEV, there's nothing like it :) Staff Member

    Hi Brandon:

    ___Price controls do not normally work as you have surmised. In the case of the Chinese, they are not holding fuel prices below world market as in much of the Middle East and Venezuela for example but are mandating the $/gallon at a price just a touch above the NYMEX contract. It is quasi price fixing but not below market and there is a huge difference.

    ___Either way, even the burgeoning Chinese middle class has to see fuel prices as a huge detriment to vehicle ownership which may actually be a good thing?

    ___Good Luck

  5. tigerhonaker

    tigerhonaker Platinum Contributor


    I think you are correct. Comment by Wayne (xcel):
    ___Either way, even the burgeoning Chinese middle class has to see fuel prices as a huge detriment to vehicle ownership which may actually be a good thing?

    If the prices stay up on Fuel for the ever Growing Number of Middle Class Chinese that would like to purchase a vehicle. The price of fuel may Hold-Down that number of Vehicles Sold in China and possibly at the same time, help us with China not using the Majority of Oil being Produced by OPEC.

    A good thing here maybe.
  6. AZBrandon

    AZBrandon Guest

    Speaking of price controls, I saw in the news today Hawaii is repealing their short-lived price control law already. They said that because of the way it was written, it ended up costing between 5 and 20 cents per gallon more because the only way the stations could ensure they wouldn't lose money was to just increase their margin anyway. No idea how it was that they wrote the law, but the bottom line is that the exact same congress that voted it into law is now striking down that law, so it must have been deemed totally unworkable.
  7. philmcneal

    philmcneal Has it been 10 years? Wow

    kinda sucks when chinese money is worth less.

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