Shenzhen has become the 7th major city in China (after Beijing, Shanghai, Guangzhou, Tianjin, Hangzhou and Guiyang) to impose limits on new car purchases. The trend is clear and is likely to come to more cities in the months ahead.

Shenzhen imposed a hard cap of 100,000 new license plates annually, a 180 degree turn around from a year ago when the Mayor committed to rely on market forces to improve traffic conditions. Additionally, the city banned all vehicles without local license plates from central Shenzhen during rush hour. (I wonder if this will impact the many dual license plate cars that drive from Hong Kong into Shenzhen every morning.)

100,000 new license plates compares to sales of over 500,000 vehicles in Shenzhen in 2014, about half of which were new sales and half were replacement. Shenzhen’s total vehicle stock is now just over three million (but with only one million official parking spaces).

Replacement sales should be relatively unaffected, as existing owners will be able to take their current license plate to a new vehicle. However, their current car will be worth less as potential buyers would have to buy a license plate first. Prospective buyers probably won’t bother.

The secondhand car market is likely to be severely impacted as it will be close to impossible to obtain a license plate, as plates will be issued half by auction (favoring wealthier buyers) and half by lottery (discouraging anyone from exploring a purchase until they have won a license). And 20% of licenses will be reserved for electric vehicles, further reducing the number of potential licenses open for second hand buyers. The market for moving secondhand cars out of Shenzhen into neighboring cities that have not imposed license restrictions will grow.

In the new car market in Shenzhen, first time entry level buyers will be disadvantaged. Scarcity of licenses will shift the market towards premium vehicles, whose owners can afford to pay for a license in the auction or the grey market. But eventually the premium market may also find itself squeezed by the additional costs imposed on car purchase.

Purchases of new cars in cities still without license restrictions may see a one-time boost in 2015 as buyers rush to buy in fear of imminent restrictions. Indeed, some entrepreneurs may seek to stockpile license plates in these cities in anticipation of something that costs very little today becoming overnight worth many thousands of dollars. Inland provinces are already the faster growing markets for new cars in China.

Perhaps you could argue that these restrictions might be more PR than substance. In many of the cities with restrictions the ratio of car ownership to households already exceeds 0.7. It’s not likely to go much higher given the cost of parking and the length of the drive to work.

If local governments invested more in their public transport it would be one of the most productive and sustainable actions they could take. Beijing, for example, has added over 230 miles of new subways in the last 7 years, as illustrated in this graphic.

Imagine what the traffic congestion in Beijing would be without this.

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Image credit: Chris / Flickr