China is rushing to tamp down fears of an abrupt end to its RMB 300 billion (USD 42 billion) subsidy program now that several cities have suspended or downsized their plans earlier than anticipated.
“Are some regions canceling ‘national subsidies’? Not true,” read a headline published by state news agency Xinhua on June 18 evening. The article assured readers that the program will continue, citing “interviews with relevant departments and officials across various regions.”
Still, cities across the country have either partially suspended or adjusted their subsidy programs in June, raising questions about the sustainability of a program that has been credited with buoying weak consumption and countering deflationary pressure.
China rolled out subsidies last year to encourage consumers to trade in old cars and appliances for new ones. The program was then expanded to include outright purchases of a wide range of electronics including smartphones and laptops, and the government approved special bond issuances worth RMB 300 billion this year to fund it. The subsidies are implemented by municipalities.
On June 19, the southeastern city of Guangzhou stopped subsidies for home appliances and electronics, according to a notice on its portal. The nearby city of Foshan suspended subsidies for some items in early June and said they would resume on August 1. Chongqing, in western China, stopped providing subsidies for appliances and home equipment around the same time.
The northeastern city of Shenyang now only allows buyers to obtain subsidies from 9 a.m. to 12 p.m. Subsidies for cars, home appliances, smartphones and home equipment will be suspended on July 1, city officials said.
“The funding is running out a bit earlier than expected, as this batch is meant to last until the end of July,” said Duncan Wrigley, chief China economist at Pantheon Macroeconomics.
Worries over the program’s future escalated in recent days after merchants looking for a boost in sales during the 618 shopping festival began running exaggerated marketing campaigns. The numerals refer to June 18, the day e-commerce company JD.com was founded. But this year’s campaign has run for over a month and was still ongoing as of June 19.
“Shanghai’s subsidies will be over soon,” read a social media post by a mattress seller in the city, urging shoppers to “grab the last wave of 618 benefits.” Shanghai has not announced plans to suspend its subsidy program.
Overall, the subsidy policy is widely credited with boosting the consumption of items under its scope. Retail sales in May beat expectations, growing 6.4% on the year, driven by a 53% surge in home appliances and a 33% jump in communication devices.
But recent reports of alleged misuse of the program have brought greater scrutiny over how it is carried out.
One practice under fire is the sale of “zero-mileage used cars,” when dealerships sell essentially new vehicles at a discount to clear inventory. This has contributed to an intense price war in the industry, prompting the Ministry of Commerce to summon automakers for a closed-door meeting, according to local media. It has also reportedly become a way for some businesses to game the subsidy system: used car businesses buy new cars from dealers while sending old inventory for scrap to obtain subsidies, then sell the new cars as used ones.
Other criticisms include merchants hiking prices before promoting the subsidized price to create an illusion of a discount. Zhejiang has reportedly investigated 76 cases of price violations linked to the subsidy program.
Wrigley said he expects automotive trade-in subsidies to be “tightened up” and additional rules to be put in place to prevent dealers and retailers from abusing the system.
The National Development and Reform Commission (NDRC) said it has disbursed two batches of funding so far, in January and April, totaling RMB 162 billion (USD 22.7 billion). The next batch is expected to be imminent. A delay in additional funding could dent consumers’ appetite.
“The outlook for retail sales in the second half of the year remains uncertain,” Serena Zhou, senior China economist at Mizuho Securities, wrote in a June report.
This article first appeared on Nikkei Asia. It has been republished here as part of 36Kr’s ongoing partnership with Nikkei.