By Wang Qing

Research Report Vol.21 No.4, 2019

I. Accelerating Decline in Auto Sales Due to Multiple Factors

After China’s auto sales shrank for the first time in 30 years in 2018, the decline accelerated in the first half of 2019 as a result of the combined effect of the market, macroeconomic, and policy factors.

1. Marked decline in main growth drivers in the first half of 2019

From January to June, 2019, China sold a total of 12.323 million vehicles by wholesale, down 12.4% year over year. As of June, auto sales had seen negative growth for 12 consecutive months, although the decline in June narrowed.

Different from the previous slowdown in growth, the auto market showed an overall decline over this period, which was markedly reflected in the slides in the previous growth drivers. This trend was obvious in terms of the type, engine displacement, price, and region. In recent years, passenger vehicles[]① have accounted for about 85% in total auto sales. In the first half of 2019, passenger vehicle sales fell by 14%, a rate much higher than that of commercial vehicles (4.1%). Specifically, the key segments that contributed to the rapid growth of the passenger vehicle market in the past saw a significant decline (see Table 1).

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2. Reasons for the significant decline

In recent years, auto consumption has played an important role in driving economic growth and stimulating consumption. In 2018, automotive products accounted for about 10% of the total retail sales of consumer goods and about 30% of the retail sales by the businesses above a designated size. From January to May 2019, automotive products were the only category with negative growth in total retail sales of consumer goods and services. The decline in auto sales was an important reason for the slowdown in consumption growth. The significant decline in auto sales and auto consumption was a result of various internal and external factors combined.

(1) The auto market is transitioning from medium-to-high growth to medium-to-low growth

According to the analysis of the auto market data in nearly 50 countries, there is a strong correlation between auto consumption and the level of economic development, and the auto market in major developed countries shows similar trends and characteristics different economic stages (see Table 2).

The growth of China’s auto market basically accords with the typical trends. In 2014, China’s per capita GDP exceeded 9,000 international dollars and the number of vehicles per 1,000 people exceeded 100 for the first time, marking that the market started to shift from high speed of growth to medium-high speed of growth. In 2018, China’s per capita GDP surpassed 12,000 international dollars[]② and the number of vehicles per 1,000 people grew to 166.

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Normally, China’s auto market would gradually shift from medium-to-high speed of growth to medium-to-low speed of growth around 2019; the growth rate of the number of vehicles per 1,000 people fall from 11%―12% to 4%―5%, and the potential sales growth rate of new vehicles drop from 5%―6% to 2%―3%. Therefore, judging from the development stage of the auto market itself, China’s auto market and auto consumption are at the second stage of natural decline after the phase of high-speed growth (see Figure 1).

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(2) Impact from the slowdown in economic growth, especially consumption growth

Auto sales growth has a strong positive correlation with auto consumption and economic expectations. Based on the analysis of relevant international data, auto consumption can rarely grow against the economic and consumption downturn. Under the impact of the escalating China-U.S. trade frictions, China’s economy has shown a downward trend since 2018. In the first half of 2019, economic indicators such as the total retail sales of consumer goods, urban fixed investment, industry value added, and total exports all indicated a slowdown in growth, which had certain negative impact on the resident income and employment expectations, as reflected in a continuous decline in auto consumption.

(3) Restraining effect of the rising residents’ leverage ratio on auto consumption

It is generally believed that rapid hikes in housing prices across the country has a crowding-out effect on the overall consumption including auto consumption, becoming the main factor leading to the sharp decline in auto sales. The analysis of domestic and foreign housing prices and auto consumption finds that wide fluctuations of housing prices have different effects on the auto market in the medium and short term. From the perspective of 28 developed and developing countries with a large auto market, mild changes in housing prices have no obvious correlation with auto sales. If the data during the period of drastic housing price fluctuations in the sample countries is stripped away, it can be seen that housing price fluctuations and auto sales growth go in the same direction (see Figure 2).

In short, the rapid rise in housing prices in a period of time does not directly lead to a sharp slowdown in the growth of the auto market. The logic is that the jump in house prices, together with income and rigid household expenditure, has influence on the residents’ leverage ratio[③ Leverage ratio of the residential sector = (Loan balance of the resident sector ÷ nominal GDP) * 100%.]③, thus affecting consumer decision-making and ultimately auto consumption. Hence, the residents’ leverage ratio has a more direct impact on auto market volatility and has an obvious negative correlation with the change in auto sales growth in China.

(4) Policy impact In the first half of 2019, relevant policies had important impact on the auto market. In terms of the passenger vehicle market, 15 provinces and municipalities in the “key regions” of air pollution control (Beijing, Tianjin, Hebei, parts of North China and Northwest China, and the Yangtze River Delta), the Pearl River Delta, Chengdu, and Chongqing implemented the National Standard VI in advancefrom July 1, 2019.

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