UPDATE 2-China car sales skid in May as economy slows


(Adds analyst comments, details)

By Ben Blanchard

SHANGHAI, June 15 (Reuters) - Car sales in China skidded 19.4 percent in May from April, the second straight monthly decline, as efforts to apply the brakes to a racing economy and restrict easy auto loans kept potential buyers at bay.

Investors and economists have been watching the fast-growing auto industry for signs that Beijing's recent steps to cool overheating sectors of the economy were taking effect.

But for market leaders such as Volkswagen AG and General Motors Corp the slide is a worrying sign that a production boom is outpacing demand.

A total of 177,500 cars rolled out of showrooms last month, down from 220,100 in April, the China Association of Automobile Manufacturers said on Tuesday. Sales in April had already slipped 2.7 percent from March.

"The main reason (for the fall) is because there's been a tightening of credit, of auto loans," said Christopher Lee of Standard & Poor's Asian Equity Research. "Most consumers are taking a wait-and-see attitude toward buying cars."

Speculation of a 20 percent dive in May sales drove Hong Kong-listed auto stocks such as Denway Motors Ltd and Brilliance China Automotive sharply lower last week. Brilliance was down five percent on Tuesday afternoon and Denway was down three percent, underperforming the market's slight fall.

Sales were still up 21 percent versus May 2003. But growth is trending lower following a 38.2 percent rise in April from a year ago, and a 76.8 percent rise in February.

Car sales tend to slow in May because of the week-long Labour Day break, but the fall was bigger than in previous years. In 2003, May sales slipped six percent from April -- a smaller fall partly because Chinese bought cars to get away from public transport during last year's SARS outbreak.

May 2004 sales also fell short of the 215,100 cars produced in the same month by 37,600 automobiles -- nearly double April's shortfall -- indicating inventories piled up.

The State Statistical Bureau said on Monday that manufacturers and distributors had about 103,000 unsold cars at the end of April, equivalent to about 16 days output.

That bodes ill for foreign car makers, which are spending $13 billion to triple annual capacity to some six million units by the end of the decade.

Analysts have warned of a glut and price war.

"Because of the effect of the long Labour Day holidays, production and sales fell markedly from April," the industry body said on its Web site (www.auto-stats.org.cn).

But it added: "Production is still growing quite fast."


Market leaders Volkswagen and GM are between them planning to more than double capacity to some three million units by 2008, but say they are unworried by decelerating sales growth. They say China's growth would still outpace mature markets such as the United States.

"Judging from what we know now, the next couple of months sales are probably going to be down," said Lee. "If I took a 12-month view, I think maybe you'd see car sales picking up at the end of the year."

That could mean sales in 2004 growing 20 percent from 2003, he said, well below the 80 percent and 50 percent growth seen in the past two years, respectively.

Just over two million cars were sold in China last year as a decade of strong economic growth put cash in the pockets of Chinese starved of consumables.

In the first five months of 2004, 964,700 cars were sold, up 37.7 percent from the same period of 2003.

Beijing is now restricting the amount of auto loans that commercial banks can offer, part of measures to douse an economy that grew 9.8 percent in the year through the first quarter.

Some 20 percent of sales are financed in China, compared to about 90 percent in the West.

In a sign the economy may be coming in for a gentle landing rather than a crash, industrial output rose a weaker-than-expected 17.5 percent in the year through May, the slowest annual pace in seven months.

(Additional reporting by Vivian Xiao)



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