Exclusive-Local Chinese governments promote 'zero mileage' used car exports, inflating sales, growth figures

BEIJING/SHANGHAI (Reuters) -China's auto industry has inflated car sales for years through a burgeoning government-backed grey market that registers new cars right off the assembly line and then ships them overseas as "used" vehicles.

These so-called "zero-mileage" cars have never been driven but they are being exported as used to markets like Russia, Central Asia and the Middle East, allowing Chinese automakers to show growth and to dispose of cars that it would be difficult to sell domestically, according to a Reuters review of government documents and interviews with five auto dealers and car traders.

"This is the outcome of an almost-four-year price war that has made companies desperate to book any sales possible," said Tu Le, Michigan-based founder of consultancy Sino Auto Insights.

The practice only gained national attention after the boss of Chinese automaker Great Wall Motor criticized the sale of zero-mileage used cars within China in May. On June 10 the People's Daily newspaper condemned the sale of zero-mileage used cars domestically.

The paper, which often signals the positions of China's top Communist Party leaders, blamed these fake used cars for driving down prices amid a withering domestic price war and called for "tough regulatory action" to restore order.

But the export and sale of fake used cars is actively encouraged by regional governments in China, according to a Reuters review of state media reports and government documents.

Local governments have embraced the practice as vital to meeting ambitious targets for economic growth set by Beijing, according to a Reuters review of local policy documents and state media articles.

Reuters has identified 20 local governments in China - including major export hubs like Guangdong and Sichuan - that have described their support for the export of zero-mileage used cars in publicly available government documents.

The tactics include creating extra licenses for the export of zero-mileage used cars, fast-tracking tax rebate claims, investing in export infrastructure, and funding networking events to encourage zero-mileage used-car exports, the government documents showed.

The zero-mileage used car export market works like this: as a fresh car emerges from the assembly line, an exporter buys the car either directly from the automaker or from a dealer, registers it with a Chinese license plate, and then immediately marks it as a second-hand car for shipping abroad. Along the way, the automaker books the car as sold and logs the revenue.