The Effect of Income on Vehicle Demand: Evidence from China’s New Vehicle Market

As incomes continue rising, vehicle ownership is expected to grow dramatically in China and other emerging countries. For these countries, little causal evidence exists on the effect of income on vehicle ownership. Using city-level data on new car registrations and income in China from 2005 to 2017 and using export-led growth to isolate plausibly exogenous income variation, we estimate an elasticity of new car sales to income of about 2.5. Recent projections of vehicle sales in China have understated actual sales by 36%. To meet its climate objectives, China will need more aggressive policies than previous forecasts indicate.