China’s Auto Market Will Be Hard to Jumpstart

Date: May 14, 2019
Source: Wall Street Journal
The world’s largest car market keeps skidding. Investors hoping that Beijing will push it back on track may need to wait a bit longer.
 
China’s auto sales fell 15 percent in April compared with the same month in 2018, the 10th consecutive month of decline and worse than the 11 percent drop recorded in the first quarter. That’s even after a cut in value-added tax last month prompted many car makers to reduce prices. Inventories on car lots have also picked up after dealers ran them down in the first quarter.
 
Actual demand may be a bit better than the numbers indicate, as some potential car buyers may be waiting for a more-targeted stimulus. A draft document from China’s top policy planner last month outlined policies that would benefit the auto sector specifically, including a cut in purchase taxes for rural residents and looser restrictions on license plates in major cities.
 
What eventually gets implemented, however, could be different from the draft. An auto stimulus may not give Beijing much bang for its buck: Citi estimates that a 5 percentage-point increase in the rate of auto sales growth would only boost China’s real GDP by 0.2 percent. That suggests the government is better off focusing its efforts on infrastructure investments or shoring up exports.
 
Of course, if the continuing trade conflict with the U.S. drags on into the second half of the year, Beijing may eventually have to pull out all the stops, including more tax breaks for car sales, to steady its economy. But it will be hard to match the impact of previous stimuli. The last tax break, which ended in 2017, brought forward sales, shrinking the pool of potential car buyers.
 
The current market shakeout will be particularly tough for local manufacturers. Many global auto makers are launching new models in China this year: General Motors, for example, plans to release 20 new and refreshed models. Foreign brands tend to have a better reputation for quality among Chinese consumers, and are also priced competitively.
 
After a strong rebound at the beginning of the year, Chinese auto stocks have drifted back down, but it’s too early to jump aboard. Even if Beijing does give the industry a break, fierce competition will impose a speed limit.
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