The Chinese government has proposed to cut taxes of RMB60 billion ($9 billion) in vehicle purchase earlier this week to help prop up the country’s stagnating car market, according to a Yicai report. 

The secretary-general of the China Passenger Car Association says this move could hike sales by 5% this year.

If the tax on the purchase of low-emission passenger cars is reduced to 5%, based on a rough calculation of 11 million vehicles, this will generate 5% growth in auto consumption based on earlier precedent, Cui Dongshu told Yicai Global on May 24.

Phased tax cuts amounting to RMB60 billion will be introduced on the purchase of certain car models, state-owned broadcaster China Central Television reported on May 23, citing the latest meeting of the State Council. The type of cars eligible for the tax cuts and the duration of the tax breaks were not mentioned.

At present, China only taxes the purchase of fossil-fuel-powered cars, which is currently set at 10 percent. New energy vehicles have been exempt since 2014, although this waiver is due to expire at year end.

China has slashed car taxes twice before, both times targeting small passenger cars with an engine capacity under 1.6 liter, and each time it had an immediate effect on car sales. 

After the financial crisis in 2008, China’s auto sales growth slowed to 6.7%. The tax cut in January 2009 helped sales swell by 46.1% that year, according to CAAM data. And in 2016, after a second tax break in October 2015, sales jumped to 13.7% from 2015’s 4.7%.

Yicai said that the return of Covid-19 this year has dealt a cruel blow to China’s car market, which only started to pick up last year after three straight years of losses. April sales cratered 47.6% from the year before to a 10-year low and shipments over the four months ended April 30 slumped 12.1% to 7.7 million units.