Does booming car sales equal trouble ahead?

So why exactly are Chinese car manufacturers enjoying booming sales? Does the average Chinese citizen realise that growth is only 6.1%?

The big question is where is the money coming from to buy these cars? Please don’t tell me it is cheap credit from banks with massive amounts of bad loans.

Perhaps LEX can help me out:

Cars in China [FT]

Isn’t it great when a plan comes together? A few months ago Beijing was fretting about an apparent collapse in demand for cars. Muted sales data – passenger cars fell 35 per cent between March and August – suggested that China would be lucky to get anywhere near its target of shifting 10m vehicles in 2009. Some blunt instruments later – tax cuts and subsidies for smaller vehicles – and cars are flying off forecourts. With 2.7m new vehicles shifted in the first quarter (up 4 per cent year-on-year), China has zoomed past the US (2.2m, down 38 per cent) as the world’s largest market. At that rate, Beijing will beat its 2009 target by early December. No wonder this week’s Shanghai auto show is more festive than similar events in the west, which are being scaled back or canned.

But delegates should keep some champagne on ice. Carmakers are not necessarily looking at better profits: minivans mean mini-margins. Sales of vehicles with bigger engines are falling, as they are everywhere else. This year’s overall pick-up in sales is almost certainly linked to rampant credit growth, which the banking regulator last week said it intends to tame. And the industry still has structural demand problems. Take cars: sales growth averaged about 40 per cent a year in the six years to 2008, when annual growth slipped to 7 per cent. Even with the punchy start, 2009 is set for about 5 per cent, estimates Citi. For a country with third-world penetration – 32 cars per 1,000 people in 2007 (compared to 800 in the US) – that kind of growth is hardly spectacular.

Chinese savings rates are among the world’s highest, implying huge potential for consumption to rise. But as Morgan Stanley points out, given off-book liabilities such as retirement, healthcare and education, the average consumer is practically in negative equity. Despite inducements from Beijing, households may continue to prioritise these invisible debts over a new set of wheels..

Isn’t it great when a plan comes together? A few months ago Beijing was fretting about an apparent collapse in demand for cars. Muted sales data – passenger cars fell 35 per cent between March and August – suggested that China would be lucky to get anywhere near its target of shifting 10m vehicles in 2009. Some blunt instruments later – tax cuts and subsidies for smaller vehicles – and cars are flying off forecourts. With 2.7m new vehicles shifted in the first quarter (up 4 per cent year-on-year), China has zoomed past the US (2.2m, down 38 per cent) as the world’s largest market. At that rate, Beijing will beat its 2009 target by early December. No wonder this week’s Shanghai auto show is more festive than similar events in the west, which are being scaled back or canned.

But delegates should keep some champagne on ice. Carmakers are not necessarily looking at better profits: minivans mean mini-margins. Sales of vehicles with bigger engines are falling, as they are everywhere else. This year’s overall pick-up in sales is almost certainly linked to rampant credit growth, which the banking regulator last week said it intends to tame. And the industry still has structural demand problems. Take cars: sales growth averaged about 40 per cent a year in the six years to 2008, when annual growth slipped to 7 per cent. Even with the punchy start, 2009 is set for about 5 per cent, estimates Citi. For a country with third-world penetration – 32 cars per 1,000 people in 2007 (compared to 800 in the US) – that kind of growth is hardly spectacular.

Chinese savings rates are among the world’s highest, implying huge potential for consumption to rise. But as Morgan Stanley points out, given off-book liabilities such as retirement, healthcare and education, the average consumer is practically in negative equity. Despite inducements from Beijing, households may continue to prioritise these invisible debts over a new set of wheels.


Originally published at the China Economics blog and reproduced here with the author’s permission.

3 Responses to "Does booming car sales equal trouble ahead?"

  1. NFrazier   April 22, 2009 at 11:07 am

    So, for example, if China began to (slowly) sell some of its export wealth held in US investments and spend it on ensuring free market competition between employers for labor (e.g. extending loans to others who wanted to start their own export businesses, spending on regulating employer practices, etc) and spent it on healthcare, education, and social security as well; the yuan, factory wages, real personal disposable income, and consumer demand would all rise faster than future debt service and taxpayer liabilities.With any luck, the explosive increase of wealth of Chinese exporters and government employees will encourage them to sincerely pursue policies that will decrease the wealth gap. Otherwise there may be more instances of social unrest that might force it to make such changes. Again, the US went through similar turmoil earlier in its history.But that’s the scariest part of all this; Chinese government policy makers have, for example, done historical case studies on the collapse of the Soviet Union and the old iron curtain nations precisely to prevent them from losing their grip on power. Specifically, they have learned: to keep posts like these out of the country with an internet firewall, to respond to economic slumps by financing consumption (rather than investing in the social safety net), and to keep their military prepared to crack down on the earliest signs of rebellion (like in Tibet and Tiananmen Square). Thus their study of history has enabled the Chinese government to keep it from repeating so far. So it is not clear yet that China will be forced to adopt the same types of regulation that the US developed (e.g. under the Roosevelt Administration) either.When China does become the world’s largest economy, the strains that these policies produce on the rest of the world (which are analogous to the economic strains that the US confederate states put on the northern US states leading up to the Lincoln era) may result in increasingly heated trade talks. It may be the threat of protectionism that ultimately compels Chinese policy makers to begrudgingly make further progress in promoting free market competition amongst its export factory employers as well – and thereby take responsibility for its role (and the same may apply to other exporters as well…) in stemming global debt-deflation.(To be fair, it is also probably true, on the other hand, that the balance of power in wage negotiations may be shifted too far in favor of labor in instances like that of the entitled US automakers and the amusing French “boss-nappers.”)On the other hand, the US (like Argentina) needs to learn to commit to counter-cyclical fiscal policy the way Germany and Chile have. This would restore the US current account to balance, tame debt-asset bubbles (US bank and financial regulation helps here too), prevent corporations from adding capacity that is already in excess supply during boom times, (hopefully) prevent governments from propping up capacity that needs to be shed during bust times (and possibly fund labor retraining and R&D instead) – and thereby take responsibility for its role in returning the global economy to growth.In surveying the gloom that enshrouds the global political-economy, it is clear that tensions are rising and some real changes in the directions outlined above are starting to occur. All of which paradoxically makes the downturn a little less gloomy.

  2. NFrazier   April 22, 2009 at 3:19 pm

    The idea of putting the entire global economy on the euro (or some other well managed currency) would also help to prevent the positive feedback loop of appreciating US asset prices, increasing consumer demand, increasing current account deficits, and increasing foreign investment in US assets.The US dollar, however, should not effectively be locked in at its current valuation against the yuan for the reasons stated earlier. Furthermore, nations that do not have fully modern institutions (e.g. the requisite legal infrastructure to maintain open market competition at all levels) should be taxed and the subsequent revenues should be spent on building those institutions and/or compensating those for losses sustained due to their absence.Such a shift to a global currency (not the SDR – unless the IMF taxes their purchase by the amount it expects to lose holding the bag of China’s dollar assets or redeeming SDR’s for euros) might also require something even beyond the balanced budget amendments of the European stability and growth pact – e.g. countercyclical fiscal policy that is aggressive enough to keep the real long-term cost of capital above some minimum lower bound. Otherwise, lenders can finance short term CAPEX booms or consumption with long term debt at low real interest rates (which lead to thin long-term real profit margins and vulnerability to default). During the retraction of credit and subsequent debt-deflation, debt obligations can force distress selling of assets that can subsequently be bought at artificially low prices. Adoption of a single global currency would then prevent a local government from inflating its way out of debt as recourse to such credit whipsawing. Spain, for example, probably wishes it had run more of a budget surplus during its recent construction boom which has now gone bust. It may even come to regret being on the euro at all.This may also explain why, for example, China is interested in getting fiscally profligate Argentina to yuanize but similar talks don’t appear to be under way with the fiscally counter-cyclical Chile.This may also explain the recent spat between China and the IMF about who was first in line to extend loans to the Congo. It also makes one wonder about whether Stiglitz’s criticisms of the IMF might be especially relevant today.