Which way next?

Alan Kang, China Forecasting Analyst

17 January 2019

Chinese Automotive Market

China: which way next?

China’s Light Vehicle market finished 2018 in negative territory, with a decline of 3% on the previous year. This disappointing result was the first year-on-year decline this century for the world’s largest vehicle market.

The full-year fall came about despite a promising start to 2018, and can be attributed to a number of negative factors. For one, the market was still in payback mode after the phase-out of the temporary purchase duty cut on small-engine vehicles. The policy, which ran from October 2015 to December 2017, supported the market boom, most notably in 2016, but pulled sales forward from 2018.

“the escalating tariff conflict between the US and China brought much uncertainty to the Chinese economy”

Secondly, the escalating tariff conflict between the US and China brought much uncertainty to the Chinese economy, hitting consumer confidence. A further distortion came in Q4 2018, when rumours that the government would reinstate the tax cut policy caused some consumers to postpone vehicle purchases. Additional rumours then circulated, suggesting that the implementation of State VI emissions standards might be brought forward in certain regions, leading to some consumers delaying the purchase of State V standard vehicles.

Chinese Automotive Market

So, what next for China’s Light Vehicle market? For 2019, the payback from the 2015-2017 tax incentives will have dissipated, along with the impact from the rumoured duty cuts that led to further postponed purchases. On the economic front, meanwhile, the Chinese government is emphasising the likely introduction of a counter-cyclical policy that will see expanded investment and infrastructure construction to support economic growth. Personal income tax cuts and the coming reduction in corporate tax rates should also improve income levels and, in turn, support Light Vehicle demand. Government policy focused on New Energy Vehicles could provide further support to the market.

“Our base forecast for China is growth of around 1% in 2019”

Nor should we overlook the underlying car density trend, which, at around 145 per 1,000 adults, is still substantially lower than in mature markets and, indeed, many developing markets, leaving ample scope for growth in the medium to longer term.

Our base forecast for China is growth of around 1% in 2019. A number of risks still remain, however, not least from swollen inventory levels at dealerships and the uncertain future of the tit-for-tat tariff spat between the US and China. If the trade war escalates, China’s Light Vehicle market could suffer a substantial blow, particularly in Tier I and II cities, where exports play a critical role in the local economy. In short, while we envisage the return of positive growth this year, it would be unwise to ignore these downside risks.