Future Tech

China wants everyone to trade in their old cars, fridges to help save its economy

Tan KW
Publish date: Tue, 23 Apr 2024, 03:55 PM
Tan KW
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Future Tech

China’s world-beating electric vehicle industry, at the heart of growing trade tensions with the US and Europe, is set to receive a big boost from the government’s latest effort to accelerate growth.

That’s one takeaway from what Beijing has revealed about its plan for incentives that will encourage Chinese businesses and households to adopt cleaner technologies. It’s widely expected to be one of this year’s main stimulus programmes, though question-marks remain - including how much the government will spend.

Four months after President Xi Jinping flagged a proposal to help households and businesses upgrade old machinery, details are still trickling out. At a briefing earlier this month officials from multiple departments announced the fullest version so far, and promised more to come.

Trade-ins have the potential to speed up growth, currently forecast to fall a bit short of China’s target of about 5%. They can also make it less lopsided, by encouraging purchases at home to balance an export drive. That could ease some of the global concern about overcapacity in China’s factories.

Local governments will be in charge of many practicalities. The city of Suzhou, in China’s wealthy Jiangsu province, already began - announcing subsidies worth 100mil yuan for cars (up to 6,000 yuan/RM3,957 per buyer) and 20mil yuan for appliances (a maximum 1,500 yuan/RM989 for each machine) starting April 20.

Here is what Beijing has announced and what investors are waiting to find out:

1. What is China’s trade-in plan?

The sweeping programme aims to upgrade China’s stock of industrial and household equipment - taking older machines that use more energy or emit more pollution out of service, and giving a lift to consumer spending and business investment along the way.

It covers everything from heavy industries like petrochemicals and steel, to installing new elevators in apartment buildings, to incentives for consumers to scrap their old washing machines and buy new ones that use less water.

China’s top economic planning agency says investment on equipment upgrades in key industries was 4.9 trillion yuan last year, and the goal is a 25% increase by 2027.

2. How much will China’s latest stimulus plan cost?

Beijing hasn’t specified how much cash it’s ready to provide, though officials have described some of the financing tools.

On the household side, auto trade-ins look set to be the focus of fiscal support from the central government. Subsidies will be offered to consumers who buy new EVs or other energy-conserving cars. Local authorities will share some of the costs.

For appliance upgrades regional governments - at least, the ones that aren’t too deep in debt trouble - are expected to shoulder all the burden, signaling it’s a lower priority for Beijing.

For industry there’ll be a mix of subsidies, government investment in new equipment, tax breaks for cleaner producers and discounted loans to help firms upgrade.

There are sticks as well as carrots. New environmental standards for machinery “will force companies to get rid of some old equipment”, says Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc, calling that “the most distinctive feature” of the plan.

3. How will the programme help speed up China’s growth?

Much of the spending may fall within existing budget proposals, and its impact is likely built into the official growth target, says Ding. “I don’t think it will lead to additional fiscal stimulus,” he adds, though it “will provide the government with more channels to fully spend” money already set aside.

As for the extra consumer and business spending it will trigger, that’s hard to specify without the financing details, says Duncan Wrigley at Pantheon Economics. For now he’s estimating a total around 0.7 percentage point of China’s gross domestic product.

Economists at Citigroup Inc said in a note that trade-ins under the plan could boost retail sales by about 0.5% this year, while equipment upgrades could increase China’s widest measure of investment by 0.4 percentage points through 2027.

Last month, Goldman Sachs economists estimated a 0.6 percentage-point lift to GDP in 2024, with more than two-thirds coming from extra household spending, mostly on cars. That figure came before the State Council, China’s cabinet, released details.

The immediate GDP boost isn’t the only objective, Wrigley says, contrasting the current program with the emergency stimulus China rolled out after the Global Financial Crisis. “The programme sets targets for 2027, implying medium-term growth support for domestic demand to offset the drag from the slowly adjusting property market,” he says.

4. Will it help rebalance the economy?

Xi has called for a focus on advanced industries, and China’s EV success is a symbol of that government-guided effort. But China is accused by the US and Europe of flooding global markets with cheap goods and not doing enough to encourage local demand. The trade-in plan, by helping Chinese buyers, could go some way toward addressing that criticism.

For carmakers, who face likely countermeasures in the European Union this year, it offers a hedge against a potential slowdown in exports. More broadly, the way support is allocated between households and industry - which isn’t entirely clear yet - will reveal whether the programme can help offset an over-reliance on investment versus consumption to drive economic growth.

Another charge against Beijing, reiterated by German Chancellor Olaf Scholz during a visit last week, is that international firms suffer discrimination in Chinese markets. At the April 11 briefing, a Ministry of Commerce official emphasised foreign and domestic companies will get equal treatment under the trade-in plan.

5. What will happen to the old stuff?

By requiring higher standards for the recyclability of products like lithium batteries, the plan will help Chinese businesses expand in overseas markets, especially “regions that have high environment standards”, Ding says.

The programme includes investment in recycling networks, with 2,000 stations to be added across China this year, and logistical systems. Ecommerce firms and appliance producers, for example, will be encouraged to collect old machines at the doorstep.

As of last year, China had 336 million cars and more than three billion fridges, washing machines and air-conditioners, according to Beijing. Recycling even a small share would be a challenge.

“China has repeatedly fallen short of its own car and appliance recycling targets,” says Wrigley at Pantheon. “Many supposedly recycled cars end up back on the road, despite being a safety hazard and highly polluting.”

 - Bloomberg

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