China said it will encourage foreign investment in vehicle manufacturing in its western region, reversing a policy to remove automaking from a list of industries qualifying for government incentives.
Starting June 10, foreign auto investment will be given preferential treatment, the National Development and Reform Commission and Ministry of Commerce said in a joint statement today, without giving more details. The policy was among measures taken to encourage labor-intensive projects in the central and western regions, which attracted $19.2 billion in overseas investment last year, according to the statement.
The announcement follows official figures this week that showed foreign direct investment growth slowed in April, highlighting concern at the outlook for the world’s second-biggest economy. Giving foreign automakers preferential treatment in building plants may allow companies like Volkswagen AG (VOW) and General Motors Co. (GM:US) to accelerate expansion in China, increasing competition for local companies.
“The change in policy direction is meant to boost foreign investment and economic growth rather than for the need of the auto industry,” Zhang Xin, an analyst with Guotai Junan Securities Co. in Beijing, said by telephone. “It could well cause an increase in excess capacity and make it more difficult for local automakers to compete with foreign companies.”
Under the new policy, automakers will be encouraged to set up auto factories in Inner Mongolia, Guangxi, Guizhou, Shanxi, Gansu, Ningxia, Qinghai, Xinjiang, Yunnan and Sichuan as well as the municipality of Chongqing, according to the statement.
Foreign companies received preferential treatment for seven years on their Chinese plants until Jan. 30, 2011, when the NDRC removed the industry from its list of favored industries for investment to clamp down on overcapacity.
Volkswagen and GM are among foreign automakers expanding their production in China to cater to demand in the world’s largest vehicle market, estimated by the nation’s auto association projects to exceed 20 million units this year.
Volkswagen said yesterday it began construction of a new factory in Changsha in southern China, part of its 9.8 billion-euro ($13 billion) investment in China. GM said this month it won regulatory approval to build a Cadillac factory in Shanghai.
Overseas automakers have set up more than 40 vehicle-manufacturing joint ventures in China in the past 30 years, helping auto production surge more than 100-fold to about 19.3 million units last year, according to NDRC.
“Most joint ventures set up by foreign automakers have been struggling with insufficient capacity while a lot of local automakers face overcapacity problems caused by weaker competitiveness,” Lin Huaibin, a Shanghai-based analyst at IHS Automotive, said by telephone. “More and more foreign automakers are expanding to the central and western part of the country to help tap rising potential demand there.”
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