China Market

Alan Kang, Senior Market Analyst

08 November 2019

chinese auto market

Downside risk looms over Chinese market

China’s Passenger Vehicle sales (i.e. wholesales) in September fell by 6% year-on-year to 2.0 million units, leaving the year-to-date result at -11%. For Q3 as a whole, the wholesale market also declined by 6%. While still negative, this result is a clear improvement on the steeper contractions seen in the first (-14%) and second (-12%) quarters.

To understand the double-digit drop in Q1 wholesales, we must look to the end of 2018 when dealership inventories were unusually high. Additional stocks of around 1.4 million vehicles were delivered to dealers. When the market failed to perform as expected, however, OEMs had no choice but to limit production and wholesale volumes in order to reduce these bloated stocks.

The double-digit decline in Q2 can be explained by the implementation of State VI (a) and State VI (b) emissions standards being brought forward in several regions of China to 1 July 2019, well ahead of the original date of 1 July 2020 for State VI (a) and 1 July 2023 for State VI (b). This early deployment of the new regulations played havoc with automakers’ regular production and wholesale schedules as distributors in the regions where the new standards came into force suspended all new vehicle purchases until they had successfully depleted existing stocks of State V models.

Given the discernable improvement in the rate of decline in Q3, when compared to the two previous quarters, we can safely assume that a recovery is in progress. Now that stocks have been unwound and the turbulence created by the shift from State V to State VI regulations has dissipated, the danger to the wholesale side of the market should have passed.

“Retail sales of domestically produced models declined by 10% in September, marking the third consecutive month of contraction”

The retail side of the market, on the other hand, paints a very different picture. Retail sales of domestically produced models declined by 10% in September, marking the third consecutive month of contraction, following booming demand in June.

If, as the recent downtrend seems to indicate, the retail market is currently subdued, then the chances of a strong rebound in wholesales in the final quarter of 2019 are rapidly evaporating.

While some component suppliers have reported a rise in orders for Q4, this could be misleading. If output volumes increase in the final period of 2019, but the retail market fails to rally, then these unsold vehicles will do little more than bloat stock levels in 2020.