August 12, 2008 / 9:53 AM / 11 years ago

Slowing economy, high fuel costs dent China car market

SHANGHAI (Reuters) - China’s car market, the world’s second largest, is losing speed more quickly than expected due to a slowing economy, rising fuel prices and natural disasters, raising the prospect that sales growth could halve this year.

Growing by at least 20 percent a year for the past three years, China has been one of the few bright spots for General Motors Corp (GM.N) and other global auto giants as they struggle with a slump in U.S. and European markets.

But sales growth in July slowed to a single-digit rate for the first time in two years. This may be the shape of things to come, even with a renewed focus on growth by China’s economic policy makers.

“It’s slowing down more than we anticipated,” said John Bonnell, director of J.D. Power Asia Pacific Forecasting.

“Our forecast from the beginning of the year was about 15 percent growth, or about 6.2 million passenger vehicles. We just revised our forecast down to about 5.95 million units.”

In July, sales of sedans, multipurpose vehicles and sport utility vehicles in China climbed 6.79 percent from a year earlier, the smallest monthly gain in two years and well below annual growth of 20-30 percent since 2005.

For a graphic on China car sales, click

here

Reflecting the slowdown, inventories of unsold new vehicles rose to a four-year high of 170,000 units at the end of the first half, state media reported in July.

Growth in the first half had already dipped below 20 percent, hampered in part by natural disasters. Snowstorms early in the year disrupted shipments of parts supplies and kept consumers away from showrooms, while the devastating May 12 earthquake in Sichuan province further dampened consumer sentiment.

FUEL PRICES

Those one-off setbacks were followed by an unexpected hike in fuel prices in late June.

Fuel prices had not been a big worry for Chinese car buyers, as low state-set price caps shielded them from high global oil prices that hit a record high of above $147 per barrel in July.

But the June hike raised retail gasoline and diesel prices by nearly 20 percent, the first rise in seven months and the steepest one-off hike ever.

“Chinese buyers have something else to worry about now other than coming up with the cash to pay for the car,” said Chen Qiaoning, analyst with ABN AMRO TEDA Fund Management.

“Even though a single price hike may not be that big a deal, it will get them wondering where things are going and how much higher the price could be.”

An on-line survey in China by J.D. Power and Internet portal Sina.com last month showed 26 percent of respondents who intended to buy a new vehicle this year would delay their purchase.

At this point, J.D. Power is still forecasting 10-11 percent annual growth in China’s car sales until 2012. But Bonnell said there was about a 30 percent chance of little or no growth in sales in 2009 or 2010, if the economy slows further.

Several other analysts also saw a chance that sales growth could dip below 10 percent, after rising 21.7 percent in 2007.

“Single-digit growth in one particular year is not impossible given the uncertainties,” said Wang Mingcun, an industry analyst at Tianxiang Consulting.

AUTOMAKERS UPBEAT

Despite analysts’ warnings, many Chinese automakers ruled out the prospect of growth remaining in single-digit territory for a sustained period in the foreseeable future, especially after Beijing’s apparent shift in policy priorities to favour growth.

“As long as we can keep the economy growing at 8 percent annually, I see no problem maintaining a more than 10 percent rise in car sales,” said a senior executive at Dongfeng Motor Group Co (0489.HK), China’s third-largest automaker which runs separate vehicle ventures with Honda Motor (7267.T), Nissan Motor (7201.T) and PSA Peugeot-Citroen (PEUP.PA).

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