Encouraging Signs in China’s Sluggish Auto Industry

China’s vehicle sales declined for the 10th month in a row in March and fell by double digits during the first three months of the year. Despite this gloomy performance, however, encouraging signs are providing hope that the worst may be over for China autos.

After slowing throughout 2018, China's economy has responded to recent stimulus measures, expanding by 6.4 percent in the first quarter, above expectations and at the top end of the 6.0 to 6.5 percent range projected for all of 2019. While the Trade War with the United States has not yet been resolved, talks between the two countries have been frequent and, by all accounts, productive in recent months, and an announcement may come as early as late May when China's President Xi Jinping and U.S. President Donald Trump are expected on Trump’s trip to Asia. Responding to a stabilizing economy and the positive trends in trade talks, China’s stock markets have surged this year, with the Shanghai Index up 24 percent on the year. China stocks have now recovered almost all of the losses suffered in 2018’s market collapse.

Against this backdrop of a stabilizing economy, China’s vehicle sales have continued to be sluggish in the early months of 2019, following a weak 2018 when vehicle sales declined for the first time in memory. For the first quarter, total vehicle sales were down 11.3 percent year on year to 6.4 million vehicles, with passenger cars declining by 14 percent and commercial vehicle sales, led by trucks, registering a modest 2 percent increase over the previous year.

In an attempt to stimulate consumer demand, China’s National Development and Reform Commission (“NDRC”) released the draft of a broad-based “Plan to Stimulate Consumption of Autos, Home Appliances, and Consumer Electronics, and Promote Circular Economic Development (2019-2020)” earlier this year. Wang Yun, a researcher at the China Academy of Macroeconomic Research, which is affiliated to the NDRC, said that: “The plan targets short-and long-term consumption, and focuses on stabilizing large-scale products while also cultivating new drivers.” The plan’s objective is to optimize policies with respect to automobiles, housing and household appliances; to encourage consumption of green and smart appliances in urban and rural areas; and to unleash the potential of online shopping and tourism in China’s rural areas.

In order to signal the Chinese government’s continued strong support for the auto industry in general, and the purchase of New Energy Vehicles (NEVs) in particular, the draft addresses all aspects of auto demand. In the seven Chinese cities where license plate restrictions are in place, the draft proposes to end the license plate lottery for first-time automobile buyers. Recognizing that many young buyers in China’s Tier 3 and Tier 4 cities have been deprived of financing by last year’s collapse of many online lending platforms, the draft includes increased support for auto financing, especially in the country’s lower tier cities. In order to reduce the cost of purchasing a vehicle and encourage a switch to smaller vehicles, the draft proposes reducing the consumption tax on cars with 1.6-liter engines or less from 10 percent to five percent. Finally, in order to encourage the purchase of NEVs, the draft includes subsidies and personal tax credits for purchases of these vehicles, as well as a mandate that all taxis, ride-hailing fleets, and municipal vehicles must be NEVs.

As if taking a cue from the government, the exhibitors at the Shanghai Auto Show last month proudly displayed a plethora of new NEV models, and consumers demonstrated their support for the government’s initiatives in the first quarter with record purchases of NEVs. During the first three months of this year, NEV sales surged by 110 percent to 299,000 units.

At the start of 2019, the China Association of Automobile Manufacturers predicted that the country’s total car sales in the new year would be roughly the same as in 2018. Given events since then, auto observers are cautiously optimistic that vehicle sales will pick up in the second half of the year, and that the worst is behind the industry. That certainly was the sentiment of auto executives who spoke publicly at the Shanghai Auto Show which just ended.

Apart from the effects of the government’s stimulus measures, it is difficult to overestimate the positive impact on China’s economy -- and auto sales --- that a successful resolution of the Trade War with the United States will have. Autos are big-ticket items, and a high degree of consumer confidence is needed to have robust sales. Ever since President Trump announced last March that the United States would take multiple steps, including imposing significant tariffs on China’s U.S. exports, to protect American technology and intellectual property from discriminatory and burdensome trade practices, China’s economy, stock market, and currency have been under pressure. The onset of the Trade War had an immediate negative impact on consumer and investor sentiment, as consumers and investors alike worried that trade issues could lead to a broader split with the United States. As productive talks between the two countries resumed following the dinner between President Xi and President Trump in Buenos Aires on December 1, China’s stock market and currency began to recover.

All things considered, the stars seem to be aligned for a rebound in China’s auto industry. If nothing else, the trend seems to be headed in the right direction. After declining by 15.8 percent and 13.8 percent in January and February, respectively, auto sales were down by only 5.2 percent in March. However, given that China’s plan to stimulate consumption may only be implemented in May, auto sales in June may provide the first real indication as to how 2019 will shake out.