Key Takeaways:
China’s rapid adoption of EVs is unintentionally eroding gasoline tax revenues needed for highway maintenance
A central government pause on issuance of securities backed by data assets highlights the ongoing struggle to control local government debt
By Doug Young & Rene Vanguestaine
China’s centrally planned economy is renowned for its meticulously crafted five-year plans and top-down policy directives. But even the most carefully orchestrated initiatives can spawn unexpected headaches. We’re currently seeing this play out in two different arenas that share a common theme of unintended financial consequences. First, China’s booming electric vehicle (EV) market is quietly pulling the rug out from under highway maintenance funding. Second, a sudden surge in an unusual new class of asset-backed securities — backed by data — is sparking fears that local governments are finding a new way to mask their debt.
We’ll start with the rapid rise of EVs, which now account for more than 60% of new vehicle sales in China. This boom was heavily policy-driven. Over the last decade, Beijing has sought to convince the world it was doing more than anyone else to address climate change. Promoting EV adoption on the demand side was an obvious strategy, supported initially by substantial government subsidies.
However, this success has created an unintended side effect for the thousands of kilometers of non-toll highways China has built over the last three decades. These roads rely heavily on gasoline taxes for maintenance funding. With gasoline consumption coming down, there’s suddenly less money available to fix roads. Meanwhile, the electricity powering these new cars is highly regulated, cheap, and lacks equivalent taxation.
We think officials likely knew this situation was coming, but there isn’t a clear backup plan to take up the slack. Eventually, the government will have to introduce new taxes, but we believe they’ll wait as long as they possibly can. Consumer confidence in China isn’t strong right now, and raising costs could be counterproductive. Furthermore, EV manufacturers are now vastly more important to the Chinese economy than legacy combustion-engine automakers.
Taxing electricity across the board seems unlikely, as power prices are a sensitive topic for consumers. Instead, a sensible solution might be an annual tax for the use of an EV, rather than a point-of-sale fee that could dampen demand in the current climate of consumer caution. Until then, the gap in road maintenance funding remains a looming challenge.
Slamming the brakes on data assets
While physical roads face funding shortages, a much more abstract issue is brewing in China’s financial markets. Since last year, local governments and companies have been allowed to use their data as an asset with real value to back a new class of asset-backed securities (ABS). Yet, only a year after launching, the central government is suddenly slamming on the brakes.
