By Thomas Clouse
China has begun taking steps to cool the growth of its automotive market after a 32% increase in vehicle sales last year worsened traffic and air pollution problems in many Chinese cities.
Red light: Beijing puts the brakes on auto sales
Vehicle sales totaled 18 million units in 2010, according to the China Association of Automobile Manufactures, making China the world's largest automobile market for the second year in a row. To slow the growth rate, the government recently raised the sales tax and eliminated subsidy programs for small vehicle purchases. The city of Beijing has also announced that it will significantly restrict automobile registration this year to limit the number of new cars on the road.
China's state-owned enterprises (SOEs) must pay out more of their profits to the government and other shareholders according to new rules issued in December by the finance ministry. Chinese SOEs will now pay between 5% and 15% of after-tax profits to shareholders. The new requirement will increase the amount of money available for education, healthcare and other social programs designed to boost livelihoods and free up private savings for consumption. The increased dividend payout may also reduce the tendency for SOEs to overinvest in fixed assets and speculate in real estate markets.
China's supply of money (M2) increased almost 20% in 2010, with new bank lending and foreign investment fueling much of the growth. Chinese banks extended 7.95 trillion yuan ($1.2 trillion) in RMB-denominated loans last year, down more than 17% from 2009 but still above the government's target of 7.5 trillion yuan. Foreign exchange reserves also reached a record high of $2.85 trillion in 2010 as investment from overseas poured into the country. The new lending and capital inflows boosted the money supply, which in turn pushed up prices, especially in China's property market. In response, the central bank increased reserve and interest rates several times last year and allowed its currency to appreciate slightly against the US.