China Auto and Dealers Half-year review: phase-out of 6 million yellow-label vehicles

Event.

    In March 2014, China’s central government set a target to phase out 6 millionunits of yellow-label vehicles this year (Central government targets to phaseout 6 million high-emission vehicles, 17 March 2014). We provide an updateabout this programme in this report.

    Overall, the progress is behind schedule so far. However, the pace isaccelerating, especially in anticipation of the air pollution in the upcomingwinter (very likely based on past experience), which should boost new carsales in coming months of this year and 2015.

    Impact.

    Rationale behind the decision. In the study done by the Ministry ofEnvironment Protection (MEP), 54% of total auto emissions were generatedby yellow-label vehicles, which only accounted for 13% of the vehicle fleet in2012 (more details in our report Passenger vehicles generate zero PM2.5, 29Jan 2014). In contrast, National IV (equivalent to Euro IV) and above vehiclesaccounted for 10% of the total vehicle population but generated only 1% oftotal emissions. Thus, scrapping the high-emission vehicles is a moreeffective and efficient way to reduce emissions and improve urban air qualitythan restrictions of new car sales.

    13 million yellow-label vehicles on road. Yellow-label vehicles are 1)gasoline vehicles that are below National I standards, and 2) diesel vehiclesthat are below National III standards. At the end of 2013, there were about 13million yellow-label vehicles on the road according to MEP statistics, andabout 40-50% were passenger vehicles (PV) on our estimates.

    Central government kicked the ball to each province. In May 2014, thecentral government reiterated this project in the Energy Conservation andEmission Reduction 2014-15 Action Plan but broke down the target andallocated it to each province. In our understanding, the Ministry of Finance(MoF) was reluctant to provide funding, and local governments were asked toimplement based on their respective situations.

    Carrot and stick approach adopted by local governments. Carrot: cashsubsidies are provided to encourage scrapping or replacement. Stick:increasingly more cities have announced restrictions on driving yellow-labelvehicles in urban areas.

    Progress behind schedule so far but it is accelerating. Based on newsfrom individual cities, the progress of this project is behind schedule as ofSept but local governments are accelerating efforts to encourage scrappinggiven there are less than 4 months left. There could be downside risk to thetarget of 6 million units for 2014 but it means a higher target for 2015.

    Outlook.

    The phase-out of high-emission vehicles should support the growth of autosales in the prime selling season. We believe PV sales should post doubledigitgrowth for 2014 (China autos - Gearing up for peak season, 3 Sept 2014).