Investors shouldn’t read too much in the latest signs of life in the world’s largest car market.
Retail sales of passenger cars in China rose 4.9% in June from a year ago—the first increase since May last year, according to the China Passenger Car Association. The organization doesn’t have the most reliable data, but other sources also point to stronger demand. Auto-insurance sales, which are closely linked to car sales, probably rose 12.6% last month, according to Citi forecasts.
But the good news is likely temporary. One big reason why sales rose last month is that buyers rushed to take advantage of discounts. These were offered by car makers to clear inventories before new emission standards kicked in at the beginning of July for more than a dozen provinces and municipalities, including big cities such as Beijing and Shanghai, that typically account for about two-thirds of China’s car sales. Europe experienced something similar last year when new emissions rules took effect in September: Passenger-car registrations in the European Union rose 31.2% in August, only to plunge 23.5% the following month.
China’s car market will probably be suffering from a hangover for at least a couple of months. The market may appear to return to growth later in the year as sales start to lap a lower base from last year. But even then growth could be tepid, given fragile consumer sentiment in China.
Car makers, especially those selling domestic Chinese brands, may struggle to raise prices against this backdrop. Geely Auto—the listed Chinese arm of Zhejiang Geely, which also owns Volvo and a big stake in Daimler—warned Monday its profit in the first half would drop by 40% compared with the same period of 2018. Its sales volume fell 15% in the same period, implying shrinking margins. Analysts still seem too bullish, expecting Geely’s full-year profit to fall just 6%, according to S&P Global Market Intelligence. Unless there is a dramatic recovery in the second half, they will have to slash their estimates.
Problems in China’s car market aren’t just a problem for local manufacturers. German chemical giant BASF cited the decline in Chinese auto production as a key reason for a profit warning late Monday. China has become such a large piece of the pie that it is dragging down auto sales globally.
Worryingly for industry across the world, China’s car market isn’t yet ready to shift into a higher gear.
Write to Jacky Wong at JACKY.WONG@wsj.com
https://www.wsj.com/articles/chinas-spluttering-car-market-11562671115
2019-07-09 11:21:00Z
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