BEIJING: In June, sales of passenger vehicles in China declined in year-on-year terms for the first time since the global financial crisis in 2008, excluding the months of January and February in each year, during which the year-on-year comparisons are distorted by the timing of the Lunar New Year holiday.
Sales of locally-made passenger vehicles in the month fell by 1.4 percent on last year, bringing year-on-year growth down to 2.8 percent in the and to 7.2 percent for H1 as a whole.
A closer look at the seasonally adjusted annual rate paints an equally dismal picture, with the selling rate of passenger vehicles dropping to 19 million units in June, marking the lowest level in the last 11 months since July 2014.
The average SAAR in the second quarter for passenger vehicles reached just 19.6 million units, falling from the 21 million units seen in the first quarter in 2015 and 20.8 million in the fourth quarter 2014.
China Automobile Dealers Association’s dealer-level inventory index stood at 1.68 months at the end of June, virtually unchanged from 1.7 months in May and 1.67 months in April.
Typically, wholesales strengthen at the end of each quarter, but the current high inventory levels at dealerships are undermining any potential momentum, hence the decline in passenger vehicle sales in June.
The overall inventory picture further suggests a slowdown in retail sales of passenger vehicles as dealers have made very little progress in their efforts to clear built-up stock, in spite of considerably lower wholesales.
This raises a fundamental question: is it really the case, as is commonly supposed, that the economic slowdown is the main culprit for the drop in actual demand for passenger vehicles? We think not.
The recent market volatility can be better understood by a closer analysis of vehicle registrations across China, which have followed highly diverse trends, depending on the city’s tier.
In the first five months of 2015, passenger vehicle registrations in the first-tier and second-tier cities declined by 4 percent on 2014, versus the 21 percent year-on-year growth seen during the same timeframe last year. In contrast, the comparison in third- to fifth-tier cities was decidedly consistent, with year-on-year growth of 14 percent achieved in both years.
Given that the first- and second-tier cities were responsible for almost half of the market growth in the first five months of last year, the recent slowdown in sales in the overall market is a natural consequence of the growth decline in registrations so far in 2015.
Delving a little deeper into recent developments in China’s largest cities will help to unravel the reasons behind these disparities.
As the larger cities began to implement restrictions on car purchases, consumers grew increasingly concerned that other cities would follow suit.
These fears triggered a buying frenzy in China’s major cities, which, in turn, created a payback effect and a high base, which we feel are key factors behind the current decline in sales.
Taking Nanjing, the capital city of eastern Jiangsu province, as an example, registrations of passenger vehicles in the first five months of last year surged by 60 percent year on year, to then slump by 16 percent year on year in the same period of 2015.
Not to be overlooked is the volatile stock market, which, in our opinion, has caused consumers to postpone car purchases to a considerable extent, particularly in the country’s main urban areas. Looking ahead, we expect to see dealerships make tangible strides in their efforts to shift built-up stocks during the third quarter and the fourth quarter in the wake of the production volume adjustments that automakers will inevitably make this summer.
In the months to come, these corrections will lead to significantly lower production levels in comparison to the level of wholesales.
Furthermore, once actual demand levels out in China’s largest cities, we expect the payback effect to dissipate gradually throughout the second half of the year, while previously postponed purchases are likely to be revived by next year’s Spring Festival at the latest.
In short, the outlook for the third quarter 2015 is a fairly pessimistic one given the double-hit from both high inventory levels and the deceleration in actual demand.
That being said, we have good reason to be relatively optimistic for China’s passenger vehicle sales in the final quarter of 2015 and in the year to come.
In light of the assumptions outlined above, our forecast for passenger vehicle sales in 2015 has been revised down by around 400,000 units.
Nevertheless, we envisage a brighter future as we project an upswing in the annual sales growth of passenger vehicles to 8.9 percent in 2016 from a rate of 6.7 percent this year.