Inicio Financial Will China’s trade-in plan give its economy that new car smell?

Will China’s trade-in plan give its economy that new car smell?

Will China’s trade-in plan give its economy that new car smell?

China has launched a large-scale trade-in scheme to upgrade its stock of industrial equipment and drive spending on consumer goods – one part of a larger effort to meet an ambitious annual target for economic growth – but it remains an open question whether private manufacturers and households will take part in the government initiative, and for those that do how extensive their participation will be.

In a circular released on Wednesday, the State Council, the country’s cabinet, said China aims to increase investments for equipment in heavy industry, construction, agriculture, transport, education and healthcare by at least 25 per cent in 2027 compared to last year.

It is also encouraging over 90 per cent of its industrial enterprises with revenues in excess of 20 million yuan (US$2.8 million) to leverage digital research and design tools in production as a means of loss reduction.

Big-ticket items like automobiles, home appliances and furniture are high on the priority list for the trade-in programme.

The central government is planning to double the volume of end-of-life vehicles recycled by 2027 compared to 2023, with a 30 per cent increase in the recycling rate for used appliances during the same period.

Upgrades in equipment and consumer goods will receive support from the central budget, as well as tax incentives and bank loans, the council said without providing specific figures.

The world’s second-largest economy has set a goal for gross domestic product (GDP) growth of “around 5 per cent” this year, a target seen as bold by most market observers due to last year’s higher base and a series of obstacles that have stubbornly stood in the way of a reliably robust recovery.
Beijing is grappling with a persistent slump in the property market and low confidence among investors, all while deflationary risks loom and its dollar-denominated exports have fallen 4.6 per cent year on year, the first negative figure logged since 2016.

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The National Development and Reform Commission, the country’s top economic planner, estimated last week that China’s equipment renewal demand is set to expand greatly, eventually becoming a market with an annual value of more than 5 trillion yuan (US$694 billion).

Meanwhile, the trade-in programme itself is expected to boost demand for cars and home appliances by 629.3 billion and 210.9 billion yuan respectively and contribute to 0.16 to 0.5 percentage points of GDP growth, the Bank of China estimated in a report last week.

Gary Ng, a senior economist with Natixis Corporate and Investment Banking, said Beijing’s policies will need to stay accommodative and largely state-driven if its 2027 goals are to be achieved.

Households and private firms may lack a strong incentive to leverage and spend from bank loans alone, he said, adding the benefits of the policy will be more direct for state-owned firms with ongoing investment.


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The plan will help stabilise the economy, but is inadequate to improve consumer and business sentiment on its own, Ng said, as outlooks must be changed in tandem with costs being lowered.

“It is unlikely to have a major impact unless Chinese households regain their ‘animal spirit’ in anticipating income and wealth growth, meaning the tendency to save will reduce,” he added.

China had a similar initiative during the 2008 financial crisis – making home appliances such as TVs and refrigerators affordable for rural consumers through massive subsidies – to replace a shortfall in exports with domestic demand.

The programme helped China survive the crisis, to a certain extent. According to figures from the Bank of China, the 40 billion yuan in subsidies boosted GDP growth by 0.33 percentage points in 2010 and 0.32 in 2011.