Looks like we’re headed to a car wreck in China—or at least something more seriouis than a fender bender.
On one side, speeding toward the intersection, is soaring demand for cars in China. Total vehicle sales (autos, trucks, busses) rose by 32% in 2010 to 18.06 million units. Passenger car sales jumped by 33%, according to the China Association of Automobile Manufacturers. (For comparison, sales of cars and light trucks in the United States rose by 11% in 2010 to 11.6 million units.)
On the other side, heading to the intersection with just as much speed, are a truckload of measures designed to damp demand growth in 2011. From the central government these include an end to tax breaks and subsidies. For example, the national government has raised the sales tax on small cars to 10% from 7.5% and ended subsidies for rural residents to buy cars.
From local governments even more draconian measures include restrictions on the number of new license plates, auctions to raise the price of new license plates, and a freeze on car purchases by government offices, all designed to help reduce traffic congestion that is choking cities such as Beijing and Shanghai.
For example, on December 24 Beijing introduced a new lottery system for license plates that will cap new registrations for 2011 at 240,000. That’s a third of the 2010 level. In addition only potential buyers who have paid taxes and social insurance assessments for more than five years are eligible for a new registration. That will take about 10 million potential buyers out of the market. (Beijing had 4.7 million registered vehicles at the end of November.)
The end of subsidies and local anti-congestion measures will reduce growth in China’s auto sales to 10% to 15%, projects the China Association of Automobile Manufacturers. That would still leave total auto sales on a pace to reach 20 million in 20111, according to Nomura Holdings.
In comparison U.S. auto sales are forecast to hit 12.8 million to 13.5 million in 2011
I live in China. I would not worry to much about the coming slow down in chinese auto sector.
In the 1st & 2nd quarters of 2011 there might be some slow down but things will pickup in the 3rd & 4th quarters as the auto penetration rate of only 3% in china is still too low comparing to other developed countries. Most males in China are just like any male in the rest of the world, they want to own a car as soon as they can (sometimes even cannot) afford one. Cars are getting cheaper & cheaper and more affordable than a few years ago.
I would say another 30%+ YOY increase in sales volume in 2011 is highly possible.
I think it is time to buy chinese auto sector due to recent correction. Last week I bought, on dip, 65000 shares of Sinotruck (3808) and saw it went up more than 6% in two days.
http://www.google.com/finance?q=HKG%3A3808
Regarding to 2.5% increase in sales tax. I want to clarify that this is not an increase, it is just going back to the normal (before 2009) 10% sales tax.
Since most people now living in big cities are migrants from other smaller cities, towns, and villages, if big cities government restrict car buying in big cities all people who want to buy cars have to do is hopping onto the high speed trains go back to their home towns & buy a car then drive it back into the city. Just like most driver licenses. It is very expensive & extremely hard to pass the tests in big cities. All people have to do is going back to their home town to take the tests.
Nothing on earth can stop a man’s desire to own a car!
Another good article Jim. While the gov’t might be applying the breaks, the industry will still continue to move forward. That’s why I’m long Chinese auto parts provider WATG.
Off topic – what are your thoughts on the direction gold and silver will go from this point? Is this a good entry?
“In comparison U.S. auto sales are forecast to hit 12.8 million to 13.5 million in 2011.”
It’s interesting that here in the US, we build roads (new highways, additional lanes on existing highways, etc) to counteract congestion, while in China they use regulations. This is not surprising, but I have to believe that they’re also simultaneously building roads like crazy. Their demand is many times ours, with many new first-time car buyers. Buying a car also makes a definitive social status statement in China, so I’m not sure how effective these new regulations will be.