Will the financial crisis become the turning point for China's auto industry? A dynamic computable general equilibrium analysis with imperfect competition

Abstract

Following the substantial damage from the financial crisis in 2008, can China's auto industry successfully take up new challenges and grasp the opportunities ahead? First and foremost, this paper summarises the ways that the financial crisis has impacted upon China's economy. By analysing the impacts based on the MCHUGE model, the paper concludes that reductions in export demand and consumption expectations have limited impact on China's auto industry, while the comparative reduction in investment expectations has a great impact on China's auto industry. The paper builds the MCHUGE model with imperfect competition in order to assess whether China's auto industry, characterised as an oligopoly, could successfully accept such a challenge. The conclusion of this paper indicates that the damage to China's auto industry caused by the financial crisis would appear even more serious if the static effect of an oligopoly was the only consideration. Finally, by simulating the implementation of the Revitalisation Plans of the Automobile Industry, it is concluded that the revitalisation policy aims to boost auto consumption and will thus bring new opportunities for China's auto industry; on the other hand, the mergers and acquisitions between and among auto industries, as well as the relevant potential technology progress and the popularisation of new energy automobiles, will further promote the development of China's auto industry.

Keywords:

• financial crisis
• China's auto industry
• imperfect competition
• CGE

Acknowledgement

We gratefully acknowledge the supported by the National Social Science Foundation of PRC (Grant No. 07&ZD017), National Natural Science Foundation of PRC (Grant No. 70603011, 70879039), the Emergency Project ‘Coping Research on International Financial Crisis’ of Chinese Ministry of Education (Grant No. 2009JYJR032) and the ‘985’ Project of ‘Economic Openness and Trade Development’.

Notes

Notes

1. The MVH sector in the GTAP database contains the auto sector and auto parts sector, where the auto industry includes vehicle manufacturing, modified car manufacturing, tram manufacturing and auto repair.

2. Under static expectations, we assume that the investors expect no change in the tax rate and the rental and asset prices will increase by the current rate of inflation.

3. In this simulation, we only consider the impact of the financial crisis, not including the policy of the Chinese government to stimulate the economy.

4. Comparing the IMF report in January 2009 with the IMF report in October 2008, the expected growth rate of exports in developing countries are adjusted by–6.5% in 2009 and–6.2% in 2010.

5. Rate of return equals rental price of capital divided by cost per unit of capital.

6. There is no financial mechanism in the MCHUGE model, so the loss of wealth caused by the financial crisis cannot be measured. However, as in simulation FC2, the economy is damaged by way of the decrease of disposable income.

7. In fact, the production technology can also lead to the decrease of the average product cost in the auto industry. However, the added value of the auto industry largely depends on the strategy of pricing. Meanwhile, employment gradually decreased. Thus, the contribution of employment to added value is negative if estimating by OLS. Finally, we give up estimating the production technology.

8. Although an internal scale economy is different from an external scale economy by definition, both have the performance of output expanding and an increase of average product costs from the view of industry. This paper uses an external scale economy to describe the scale economy of China's auto industry.

9. Suppose the value of the product is B and the tax rate is t ₁. If we intend to raise this tax rate to t ₂, the corresponding change of power of tax should be (B × t ₂–B × t ₁)/[B × (1 + t ₁)].