China Sets Its First Fuel-Economy Rules

[Originally published 22-Sep-2004] -- The new regulations are more stringent than United States standards, but less strict than the semi-voluntary standards that the auto industry has adopted in Europe to head off regulations there....

Published: 08-Oct-2004

tyle="MARGIN-BOTTOM: 0in">HONG KONG, Sept. 22 - Brushing aside concerns from the auto industry, the Chinese government has set fuel-economy standards on new cars, sport utility vehicles and vans for the first time, people with copies of the new rules said on Wednesday.

The regulations represent a broad effort by Beijing to address its soaring dependence on imported oil, a dependence that has helped lift oil prices around the world as producers have struggled to keep pace with rising demand.

The new rules coincide with growing difficulties in the last few months in China for multinational and domestic automakers alike, which find themselves stuck with large and growing inventories of unsold cars. After rising at a rapid annual pace of 70 percent since late 2001, auto sales peaked in March and have been falling since.

The government has been trying to forestall inflation by cooling the economy with a variety of administrative controls. China's state-owned banks have cut back sharply on car loans, and now finance fewer than one in 10 retail car purchases, down from one in three earlier this year, said Michael Dunne, the president of Automotive Resources Asia, a consulting firm based in Shanghai and Bangkok. A government freeze on many new investment projects has hurt consumer confidence, too.

The State Council, or cabinet, has begun an "in-depth investigation" into the country's "swollen auto production capacity," the official New China News Agency recently reported. In other industries, such investigations have been preludes to restrictions on the building of more factories.

The new fuel-economy rules are identical to those in a draft prepared last November by an interagency committee in Beijing.

Auto executives complained during the winter that the standards were too strict on larger, heavier cars, minivans and especially S.U.V.'s, but the executives have become largely resigned to the new standards in the last few months and have begun improving fuel economy anyway.

Volkswagen, which dominates the Chinese auto market with more than a quarter of industry sales, said in a statement that it "views China's new gas mileage policy as a positive step towards modern fuel economy and addressing the ecological impact of its rapidly growing car population and economy."

Volkswagen executives had been more critical of the draft version last November, saying that company representatives at a meeting with regulators had acquiesced to the plan despite misgivings.

"They had no choice but to agree," one of the executives said then.

The Volkswagen Santana, the best-selling car in China, will meet the first phase of the Chinese rules, which take effect next July, the company said. But Volkswagen declined to comment on whether the Santana could meet the stricter second phase of the rules, in 2008, saying that this would depend on whether advanced engine technologies can be introduced, and that this in turn would depend on whether China improves the quality of fuel sold in the country.

Because of Volkswagen's dominant role in China's auto industry, Volkswagen officials were given special access to the drafting process.

General Motors, which has the second-largest market share, said in a statement that while it still needed to study the final language of the rules, the company believed that all of its vehicles would comply at least with the first phase of the requirements next year.

People with copies of the rules said that the regulations actually received final approval on Sept. 2. Beijing officials have not yet released the final version even to automakers because they plan to hold a news conference soon in Beijing. A broad Chinese plan last month for the future of the auto industry mentioned that fuel-economy rules would be needed, but did not actually include them.

The new regulations are more stringent than United States standards, but less strict than the semi-voluntary standards that the auto industry has adopted in Europe to head off regulations there.

The rules set gas mileage requirements for cars, S.U.V.'s and minivans based on their weight. The Chinese standards for the first phase are similar to the averages for most cars now in the United States, with some improvements mandated for the second phase; the Chinese standards for minivans and S.U.V.'s are more stringent for the first phase and much more stringent for the second phase than what such vehicles now achieve in the United States.

Pickup trucks, a tiny share of the Chinese market, and commercial vehicles are exempt from the rules.

An Feng, the director of the Auto Project on Energy and Climate Change, a nonprofit group in Beijing that advised the government on the rules, said that the main effect would be to force automakers to install more gas-sipping four-cylinder engines in their models before the second phase of the rules takes effect in 2008.

Six-cylinder and eight-cylinder engines offer greater power and acceleration for drivers, but burn so much more gasoline that it would be hard to build vehicles with them that meet the new standards, Mr. An said. Extremely few Chinese motorists use their vehicles for towing, which does require a lot of power, because China's pleasure boat industry is in its infancy.

Partly with a focus on the planned standards and partly in an effort to impress Chinese regulators, Toyota announced last week that it would begin assembling Prius gasoline-electric hybrid cars in China with its joint venture partner, the First Automobile Works Corporation, also called the FAW Group.

The new standards could yet cause some confusion. Instead of allowing automakers to average the gas mileage figures for many different models, as in the United States and in the European Union, the Chinese rules set a minimum for each model. The Chinese rules also require that to be sold at all each model must meet the standards; that contrasts with the practice in the United States of assessing fines on companies that offer cars that fall short.

This would seem to make it very hard, if not impossible, to sell high-powered, but gas-guzzling sports cars in China once the new rules take effect.

Mr. An said this was an area that the policy makers still needed to review.

Most economists say that gas mileage regulations are less effective in controlling energy consumption than fuel taxes. This is because the regulations affect only new vehicles coming into use, not vehicles already on the road, and because fuel taxes tend to reduce the number of miles that motorists drive their vehicles each year, by making it more expensive to drive.

Chinese officials have been mulling fuel taxes for several years but have been slow to act, fearing public anger, especially as inflation is already becoming a problem in China.

Daniel Yergin, the chairman of Cambridge Energy Research Associates, an energy consulting firm in Cambridge, Mass., said during a visit to Hong Kong on Wednesday that his projections of Chinese oil demand for power stations suggested that the overall growth rate in Chinese oil consumption might begin to slow somewhat in the years ahead.

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