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Overseas Automakers May Bloom If Car Subsidies Wane

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Fruit wholesaler Hao Hongfu will wait until next year to buy a car from a General Motors Co venture in China, even though he could get a 1,545 yuan (US$232) tax break for buying another vehicle now.

The upcoming Baojun 630 sedan from SAIC-GM-Wuling Automotive Co should be more reliable than a Chinese brand, Hao said. He wants another car to complement the Beiqi Foton Motor Co pickup truck he uses to haul apples, pears and oranges in Shandong province.

"It is a pity to give it up," Hao said of the consumption-tax rebate. "But the Baojun looks very nice. I want to try out a foreign product."

Overseas automakers including GM, Ford Motor Co and Nissan Motor Co should benefit next year if the Chinese government ends the rebate as expected by Dec 31, said Bill Russo, a Beijing-based senior adviser at Booz & Co.

The subsidy, which cuts the tax from 10 percent of the purchase price to 7.5 percent, applies only to cars with engines of 1.6 liters or smaller, a segment of the market dominated by Chinese models.

Local brands accounted for more than 63 percent of the new models with that size engine last year, according to the China Association of Automobile Manufacturers.

"The game that has been played with incentives is to try to keep consumers, especially first-time consumers, interested in purchasing those locally branded cars," Russo said. "To phase out the subsidies is more challenging for local companies than for foreign ones."

Rising incomes also should prompt car shoppers to buy more foreign models in the world's largest auto market, Russo said. China's per capita income of US$3,744 last year was more than double the 2005 amount, according to the World Bank.

Total vehicle sales may reach a record 20 million next year, Russo said, an 11 percent increase from the manufacturers association projection of 18 million this year. Total sales are up 34 percent through November over a year earlier, and passenger-car sales rose 35 percent in the same period.

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