China’s car scam shows best and worst of subsidies

September 15, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

A lavish $4.5 billion annual payout programme for electric vehicles in China has nurtured new technology and a massive market. The largesse came at a price, though, with millions lost to scammers faking sales to claim cash. The scam showcases the best and worst of subsidies.

The audacity of the fraud is depressing: the Ministry of Finance says five carmakers raked in more than 1 billion yuan ($150 million) by cheating the system. In some cases, the cars they supposedly sold never existed. The ministry added that it had investigated 90 companies in total. Local media reported another 20 carmakers including Nissan and Hyundai were breaking rules. Nissan and Hyundai declined to comment.

Ironically, efforts to phase out subsidies and encourage the industry to stand on its own four wheels exacerbated the problem. Plans to wind down grants saw automakers rushing through sales – both real and fake – to hit deadlines for more generous payouts.

The scheme also encouraged manufacturers to compromise on standards. Since total payments were allocated according to vehicle size, cheaper and shoddier cars qualified for the same rebates as more expensive models. Chinese manufacturers produced vehicles so cheap the subsidy knocked up to 40 percent off the price. And because local authorities often committed to matching the payout, discounts of as much as 80 percent were theoretically possible.

Yet the programme doubtless boosted both new technology and sales. China accounts for 41 percent of the global market so far in 2016, according to Bernstein; the pure electric vehicle market quadrupled from a year earlier. Home-grown hero BYD is now the biggest electric car maker in the world, and there are many smaller local players.

It’s early days, and the industry will need to consolidate. But there is now a strong foundation for the electric car business to drive forward. Green cars are becoming more affordable, there is ample demand, and the state is rolling out vehicle charging infrastructure. Authorities are learning, too: tweaking the way subsidies are allocated, and aiming to end the scheme in 2020.

A Chinese electric vehicle market still looks both environmentally and financially sustainable.

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