Opinion / China Watch

China raises taxes on gas guzzlers
Updated: 2006-03-23 10:43


HONG KONG The Chinese government will increase existing taxes and impose new ones on April 1 for everything from gas-guzzling vehicles to chopsticks so as to improve the country's environmental record, conserve energy and narrow China's wide gap between rich and poor, the official New China News Agency said Wednesday.

New or higher taxes will fall on vehicles with engines of over 2 liters, disposable wooden chopsticks, planks for wood floors, luxury watches, golf clubs, golf balls and certain oil products.

China's finance ministry disclosed the higher taxes in a statement on Tuesday night, which was reported by the official New China News Agency today morning. The finance ministry statement offered the strongest signal yet that some senior Chinese officials may be having second thoughts about the rapid growth of privately owned family vehicles, which has pushed up sales from just 640,000 in 2000 to 3.1 million last year.

"In recent years, car ownership in China has grown rapidly and fuel consumption has risen considerably, and this highlights the conflict between supply and demand of oil resources," the statement said. "At the same time, pollution caused by motor cars has become the main source of pollution in big and medium-sized cities."

The finance ministry is imposing a 5 percent tax on disposable wooden chopsticks and wood floor planks, citing a need to conserve timber. Environmentalists around the world have been warning that China's voracious demand for wood was contributing to the clear-cutting of many forests, especially in Southeast Asia.

The production of disposable wooden chopsticks consumes 2 million cubic meters (70.6 million cubic feet) of timber each year, the ministry said. Plastic chopsticks, which can be washed and were reused, will not be subject to the new tax.

A new tax of 10 percent on yachts, golf clubs and golf balls, and a 20 percent tax on luxury watches, is squarely aimed at China's emerging elite of wealthy industrialists and well-connected Communist Party officials.

China's yacht market is still in its infancy, as military restrictions on ocean traffic and commercial restrictions on river traffic have mostly limited yachts to lakes although a few entrepreneurs have been able to get around the rules to cruise on the Yangtze River near Shanghai. Golf has periodically been controversial in China, especially when villages and farms are demolished with little compensation to make way for new golf courses.

The biggest commercial effect of the new taxes is likely to fall on sport utility vehicles and luxury sedans. China is reducing slightly its tax on vehicles with an engine of 1 to 1.5 liters, to 3 percent from 5 percent, while leaving the rate unchanged for slightly more powerful engines and raising rates for those with the most powerful engines.

The tax rate will climb to 20 percent, from 8 percent now, for vehicles with engines over 4 liters.

The taxes are likely to hit foreign automakers more than Chinese automakers, which tend to produce models with smaller engines. American automakers, with some of the largest models, may feel the greatest impact.

The big question for automakers is how much of the tax to pass on to consumers, as the tax is collected from the manufacturers. With a week and a half remaining until the new tax takes effect, marketing executives were scrambling on Wednesday to assess the impact and no automaker immediately announced price increases.

"We are doing the calculations and assessing the impact, and on the other hand watching the actions of our competitors," said Kenneth Hsu, a spokesman for Ford's China operations, which sell everything from compact cars with 1.6-liter engines to Lincoln Navigator full-size SUVs with 5.4-liter engines.

Trevor Hale, a DaimlerChrysler spokesman, said that the company was also assessing the taxes and noted that the company offered fuel-efficient engines; many Mercedes sedans are sold in China with considerably smaller engines than models available in the United States. Patty Zhao, a GM spokeswoman, said that GM was also examining the taxes and would issue a response by Wednesday morning.

Chinese officials had considered and rejected a tax system based on gas mileage instead of engine displacement, an approach that would have benefited foreign automakers with better technology that allows them to squeeze more power out of the same size of engine than purely Chinese manufacturers. Yale Zhang, an analyst in the Shanghai office of CSM Worldwide, a big automotive consulting firm based in the Detroit suburbs, said that Chinese automakers had growing influence in policy debates and that the new rules might lead to a proliferation of vehicles with engines a hundredth of a liter below the thresholds for higher taxes.

Chinese regulators previously imposed stringent fuel-economy regulations that take effect for all vehicles sold after July 1, and have said that they are considering a separate gas-guzzler tax for models that do not comply. The finance ministry's statement regarding tax increases on April 1 made no mention of such a gas-guzzler tax, however, and finance ministry officials could not be reached for elaboration.

The finance ministry also announced a modest new tax of a penny a liter (0.1 yuan/liter) for aviation fuel and 2 cents a liter (0.2 yuan/liter) for naphtha, solvents and lubricants, but said that it would not collect the new aviation fuel tax for now and would only collect 30 percent of the new tax on naphtha, solvents and lubricants.

Applying taxes on oil products but not collecting them while prices are high could set a precedent for how China handles taxes on gasoline and diesel. Chinese officials have said repeatedly this winter that they would like to raise fuel taxes so as to encourage conservation, but do not want to act while world oil prices are close to record levels.

China will also lower on April 1 its tax on motorcycles with engines displacing fewer than 250 milliliters to 3 percent, from 10 percent, while leaving the tax unchanged at 10 percent for motorcycles with more powerful engines. Western manufacturers like Harley Davidson are trying to break into the Chinese market with powerful bikes, while Chinese manufacturers like Lifan mainly produce less powerful models.