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Boom or bust for the auto industry's Eldorado (China)?

This is no secret: China is the auto industry's equivalent of the Eldorado. Every major car maker – from Volkswagen to BMW, GM and Ford – knows that financial success goes through this exploding market. They've invested massively to make sure they get their share of the cake. But what exactly does the future hold for the automobile in China?

A whopping 18 million cars were manufactured across the country in 2010, a number which largely exceeds the production in Japan, Germany and the United States. Many analysts point to the substantial tax incentives for new car buyers. However, the Chinese government announced that these incentives will stop as of January 1, 2011. BMW and VW both saw their stock take a nosedive as a result, even though their year-to-year sales figures were up 11 percent in November. Conversely, the GM share powered ahead due to the automaker's unrivalled presence and potential in China.

This has happened before. In 2009, the tax on cars with a displacement of 1.6 litre or less was halved to 5 percent. Then, on January 1, 2010, the tax was raised to 7.5 percent and it will soon increase to 10 percent. The China Association of Automobile Manufacturers (CAAM) panicked, but sales have kept growing exponentially.

After posting a sales improvement of about 30 percent this year, China looks stronger than ever and the government understands that it's time to generate more tax revenues from newly-purchased automobiles. As such, said revenues jumped 53.3 percent from one year earlier to US$23.77 billion in the first 11 months of 2010.

Demand is still peaking as you read these lines and Bloomberg experts predict another 10-15 percent increase for 2011. So there's no need to freak out because those crutches called incentives won't be there anymore to support the Chinese auto market.

Geely, a leading domestic car company, is likewise optimistic after finding a loophole in the tax code. Fuel-efficient cars still are sponsored by a $450 subsidy, and with some minor modifications, most small cars in China should be able to qualify.

All in all, the sun is shining bright over Chinese automakers and don't be surprised if more good news keep coming from this booming market.

Source: The Truth About Cars