Chinese Vehicle Market Grows by One-Third in 2010 on Back of Government Incentives

Sales of Chinese passenger vehicles—classified as sedans, sport utility vehicles (SUVs), and multi-purpose vehicles (MPVs) by the Chinese Association of Automobile Manufacturers (CAAM)—rose 33.8% year-on-year (y/y) in 2010 to 13,897,083 units, according to data from the industry body. Total industry volumes (TIVs), including heavy commercial vehicles (HCVs), rose 32.4% y/y to 18.06 million units as China remained the world's biggest automotive sales and production region for the second straight year. December's passenger car sales growth slowed to 18.6% y/y to 1.3 million units and TIVs rose 17.9% y/y to 1.66 million units. CAAM's outlook for the market in 2011 is for growth of between 10% and 15%, tempered by the high base of comparison, the withdrawal of government subsidies, and limits on car purchases introduced in Beijing. Commenting on December's sales result, Rao Da, secretary-general of the China Passenger Car Association (CPCA), said: "The rules to curb car purchases [in Beijing] also pushed up sales in the last month of the previous year and although the oil price keeps rising, customers are still eager to buy cars."

Meanwhile, production at the TIV level rose in line with sales, by 32.4% y/y to 18.26 million units in 2010, according to CAAM, while output rose 22.3% y/y in December to 1.87 million units.

Volkswagen (VW) remained the top-selling passenger car company at the group level, its sales rising 37% y/y in 2010 to 1.97 million units across all brands and joint ventures (JVs). However, Shanghai-General Motors (GM) was the highest-volume single passenger car JV, with 1.03 million units, a 42% surge according to CAAM, beating Shanghai-VW, which managed 1.0 million units. GM's three-way commercial vehicle JV with Shanghai and Wuling meant that it was also the top light-vehicle seller overall with 2.2 million units, according to CAAM data. Of the independent Chinese manufacturers, Chery reported a 36.3% y/y rise in volumes to 682,058 units, followed by BYD, which reported a disappointing 15.5% y/y rise to 519,806 units, well short of its reduced target of 600,000 units for the year. Geely meanwhile reported a 27.1% increase in sales to 415,286 units. BYD also saw its monthly sales slip again in December, by 15% y/y to 51,300.

Outlook and Implications

The CAAM data show some discrepancies with the figures reported by the manufacturers and IHS Global Insight previously, as classification, overseas sales (exports), and imported completely built-up (CBU) units are counted. Nevertheless, the picture in China last year was yet again one of staggering growth. The market grew by one-third in a single year as the continuation of various forms of government-led incentives propelled demand, along with underlying economic growth and a healthy dose of pent-up demand. The termination of the broad-based incentives offered on cars with engines below 1.6 litres, which had been curbed in 2010 from 2009 anyway, will have some slowing effect this year, as will Beijing's decision to try to improve worsening congestion by limiting the number of private car purchases allowed in the city. However, the government incentive has effectively been replaced by a fuel-efficient subsidy, which awards incentives for cars with engines of 1.6 litres or less that are 20% more fuel efficient than their predecessors, while the Beijing restriction will not prevent residents from buying and registering outside of the city, although they may incur some difficulty in using their cars in Beijing city environs.

Nevertheless, the outlook for 2011 is for more measured growth as the combination of a higher base of comparison, lessened incentives, and rising inflation is expected to lead to tightening credit markets. In addition, the rise in oil prices recently has seen fuel costs surge, although this is not a deterrent as such. However, despite the recent rise in inflation, China's economy is still not in any immediate danger of overheating, thus tightening policies are unlikely to turn draconian. The spike in consumer price inflation in recent months has been mostly due to surging food price inflation, which has been caused by bad weather and high international commodity prices. Excess liquidity due to massive monetary stimulus, however, has had a nominal impact on food price inflation. Non-food consumer price inflation, on the other hand, has remained tame. Given that foodstuffs carry a large weighting in China's consumer basket—34% of the consumer price index (CPI)—surging food price inflation can not only easily pull up overall CPI inflation, but can also ignite inflation expectations. Given that there are no economy-wide inflationary pressures, China's monetary policy stance will be geared towards managing inflation expectations, rather than implementing a serious squeeze on credit expansion.

A deceleration in economic growth is likely to continue, and a soft landing remains the most probable scenario. Economic growth has been decelerating consistently since early 2010, because of an investment slowdown caused by the property market correction. Export expansion should also continue to decelerate as low base effects wear off and the external demand recovery moderates. Policy conditions will remain accommodative for economic expansion, notwithstanding the property market tightening measures and food inflation price controls. The bank loan issuance quota for 2010 set by the central bank translates to a still robust 19% of loan growth for the year, and the quota for 2011 is unlikely to shrink substantially. Fiscal stimulus pull-back should also be tempered. Although the 4 trillion yuan of fiscal stimulus spending was scheduled for 2010, additional fiscal expenditure programmes are likely in 2011 and beyond. In the 12th five-year development plan (2011–15), a list of new target industries that the government will cultivate has been outlined, as well as plans to refocus development efforts on the coastal regions.

The policy of moderate appreciation of the renminbi should remain in place. As the recovery of external demand remains fragile, especially in China's two most important export markets of the United States and the European Union (EU), the government is likely to remain cautious in its exchange policy. The rapid export expansion since early 2010 has been due to low base effects and the return to normalcy of the export-demand rebound, which could very well be transitory. In addition, a fast-appreciating renminbi could prove detrimental to the low-margin, labour-intensive export sectors such as textiles. Although this relatively stable exchange-rate policy makes the government's tightening measures to temper liquidity growth and control inflation more difficult, given that social stability is at the very top of the Chinese leadership's policy objectives, the government is willing to compromise these tightening moves.