China's car sales growth to moderate next year to 3.4% from 11% in 2016

Compact sedans and MPVs to be the hardest hit.

Going into 2017, sales growth of China's passenger vehicles (PV) will likely range to 3-4% YoY compared with the double digit 11% achieved this year on roll back of tax break, said UOB Kay Hian.

"Thus far, it remains unknown as to whether the government will extend the tax break to 2017. But industry experts and OEMs are expecting the purchase tax on small cars will likely rise from 5% to 7.5% or 10% (the level before the tax break) by 1 Jan 17. In either case, PV sales will slow as the tax break in Oct 15-Dec 16 had pulled forward future demand into 4Q15-2016," it said in a report.

According to the research firm, sales of compact sedans and MPVs will be hardest hit as they were the ones which benefited the most from the tax break.

The two segments’ sales growth fell from a positive in 1Q16 to a negative in 2Q-3Q16 and rebounded to positive territory since the imposition of the tax concession in 4Q15.

UOB Kay HIan noted that after the expiry of tax break in Jan 17, sales of compact sedans and MPVs will likely come under pressure.

Meanwhile, the small (A0-class) sedan and mid-sized (B-class) sedan segments continued to see negative sales growth even after the imposition of the tax break in Oct 15.

Although these segments did not benefit from the tax break, UOB Kay Hian believes their sales will likely remain sluggish in 2017 as they are losing market share to SUVs.