Everybody Gets a Slice
Following the 3rd Plenum of the Central Committee of the Chinese Communist Party on July 22, state policymakers promised to allocate 300 Billion RMB (about $41 Billion) to promote “Large-Scale Equipment Renewals and Consumer Goods Trade-Ins”. As part of the "Trade-Ins" plan, which was initiated in March 2024, the funds from the Ultra-Long Term Special Treasury Bonds will be used for subsidy implementation as follows:
• Enhance support upgrading projects in various segments including Industrial Equipment, Environmental Infrastructures, Transportation, Logistics, Education, Cultural & Tourism, Medical Care, Energy & Power, and Aged Elevators Replacement.
• Simplify the scrapping application process and provide (or increase) subsidy for renewals of Old Coastal & Inland Passenger/Cargo Vessels; Diesel Trucks; Argo Machinery such as Tractors & Harvesters; New-Energy Passenger Cars or Fuel Passenger Cars with a displacement of 2.0L or less; New-Energy Buses and Power Batteries more than 8 years.
• Trade-In/new purchase subsidies for Private Cars (both New Energy vehicles and vehicles with a displacement of 2.0L or less), Electrical Bikes, Home Appliances, and Home Upgrades.
• Provide financial support for scrapped electrical and electronic products recycling.
• Fiscal subsidies with interest discount (for 2 years) increased from 1% to 1.5% for equipment renewal loans.
Additionally, a third plan of 3 trillion RMB ($410 billion) subsidization will be implemented in the next five years in order to facilitate the replacement of aging equipment by Central State-Owned Enterprises (CSOE). CSOE consists of 97 Enterprises and Conglomerates owned and managed by State-Assets Supervisions covering a variety of industries and segments, including railways, telecommunications, energy & power, petroleum, mining, transportation, foodstuffs, etc.
Rehashing Old Tactics
This is not the first time that China launched a nationwide subsidization campaign. In December 2007, the state kicked off a boosting plan known as “Home Appliances to Countryside” to tackle the free-fall style drop of exports after the Wall Street Crash started in July of that year. Since the adaptation rate was still low, government subsidies were provided at the time to encourage rural residents to purchase home appliances (initially limited to TVs, refrigerators, and phones). Subsidies were seen by the government as a way to boost consumption. As a result of the positive results, more categories of home appliances were subsidized, and the coverage area was expanded. Campaigns were extended until January 2013, at which point they were officially declared over.
The "Electric Vehicles Subsidy Scheme" (EVSS) was first published in 2009, providing consumers purchasing hybrid EV, pure EV, or fuel-cell EV with a 50k, 60k or 250k RMB subsidy, respectively. Later, the term “Electric Vehicles (EV)” was expanded to “New Energy Vehicles (NEV)” and the amounts were adjusted according to new types of cars, navigation ranges, etc. NEVSS was maintained until the end of 2022. NEVSS's successful incubation of the industry has played a crucial role in the current boom of New Energy industries, both manufacturing and consuming.
According to reports, the government invested 30 billion RMB in the Home Appliance to Countryside Scheme from 2009 to 2011. The subsidization given by the Government, together with the increase of disposal income increase of the people living in the countryside, caused the sales of home appliances increased by 100 billion per year which is around 20% of the annual home appliances sales revenue. Additionally, NEVSS generated 20 billion of RMB in annual sales (2% of automobile sales at that time).
Domestic Sales Pumping Up
The plan is clear from the comment made by a state official, "Large-scale equipment upgrades and replacement of consumer goods are a strong driving force, and policy support will help better release domestic demand potential."
According to IMF studies, China had a structural issue of low household consumption contribution to GDP: only 39% compared to OECD average 54%. In order to increase GDP, Chinese officials hope to close this gap.
In 2023, state planners expect home appliance sales to grow by 15% (or 0.3% of the nation's retail sales). Additionally, the large-scale equipment scheme will increase investment in these categories by 25% by 2027 compared to 2023. For the automobile industry: analysts, based on approximately 20 million fuel or New-energy cars registered that are qualified for car scraping and renewals subsidy scheme, project that an additional 1.7~3.5 million (without subsidies) car owners will consider scrapping and renewing their vehicles based on subsidies of 15k RMB (~$2.1k) for vehicles with a displacement of 2.0L or less, and 20k RMB (~$2.8k) for New-energy cars. Furthermore, 600,000 diesel trucks are eligible for scrapping, and the majority of their owners are motivated to either scrap their trucks or to scrap them early (which the relevant authorities have already planned to do in the coming years).
Is the Cake As Big As Expected?
Based on the figures expected, the plan seems ambitious. However, the current situation would be quite different from the time "Home Appliance To Countryside" and EVSS launched back in 2009-2012. At that time, there were not many people in rural areas owning home appliances (washing machines, air conditioners, TVs, refrigerators and computers) and cars were rare among general public. As a result, subsidies did influence purchasing. Festival shopping boosted purchases in the market and generated multiplier effects that the government sought.
Nowadays, these products are so common in society that purchasers must have a very strong desire to replace them. Also, people might prefer to keep more money in their pockets for rainy days due to fears of economic downturns and uncertainty about social safety net coverage. Although subsidization might make products more appealing for purchase, consumers may think twice if they really need a new unit to replace a "still good" one. During the next few months, the outcome will be evident.
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