China's Car Market Is Shifting to Lower, More Sustainable Growth

Sales in April 2010 Fell Nearly 15% From the Previous Month, Says Auto News China's Yang Jian

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SHANGHAI ( -- Nothing on the earth can resist the pull of gravity for long. So it is with China's car market.

After achieving a stunning 72% annual growth in the first quarter, passenger vehicle sales only increased 39% in April from a year earlier, according to the China Association of Automobile Manufacturers (CAAM).

Yang Jian
Yang Jian
One thing worthy of note is that April's sales, 1.1 million units, actually represented a 14.6% decrease from March's 1.3 million units.

Why has a market that remained so bullish in the first three months of this year apparently run out of steam? There are two reasons.

First, the first quarter's surprisingly high year-on-year growth was in part due to the low numbers for last year's first quarter, which forms the base for comparison.

After the global slump and the government's stimulus measures to counter it, business for carmakers and their suppliers in China did not start picking up until March 2009. This is reflected in the figures: passenger vehicle sales in January and February last year were 611,000 units and 607,000 units, respectively. But in March last year, they increased to 772,000 units?

Second, the government's stimulus measures, the effect of the small vehicle tax cut is fading. To revive China's vehicle market, in January 2009 the purchase tax for vehicles with engine displacement of 1.6 liters and below was cut from 10% to 5%.

It was an effective measure, triggering strong recovery in a segment that accounts for two-thirds, by unit sales, of the entire market, but at the beginning of this year, the government adjusted the purchase tax by increasing it to 7.5%. As a result, the role small vehicles play in sustaining market growth is diminishing.

According to CAAM's statistics, sales of passenger vehicles with engine sizes of 1.6 liters and below, which accounted for 67% of the total sales, only increased by 24% year-on-year in this year's first quarter. This was much lower than 39% for the market as a whole.

The outlook
So how much will the market grow in the rest of the year?

"Judging by the monthly as well as annual sales growth figures in the first four months, auto production and sales are gradually shifting from high speed growth to stable growth," CAAM said in a statement earlier this week.

CAAM did not specify what it meant by "stable growth". But at an industry forum held last year in Shanghai, the Association's chief secretary Dong Yang predicted 16%. That's the market's average annual growth rate in the 15 years before 2008.

There is no reason to believe that the rate it can sustain now should be any different, and the fall to this slower pace should happen soon.

According to the latest forecast by the consultancy IHS Global Insight, China's passenger vehicle sales will grow by 25% this year. But in 2011 the growth will slow to 12%.

Yang Jian is the managing editor of Automotive News China, a publication of Crain Communications.

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