OMG! The Chinese Market Could Actually Go Into Reverse!

After growing for 20 years, the Chinese car market could actually submit to gravity, says Rao Da, head of the semi-official China Passenger Car Association (CAAM). Why? Because Beijing scrapped incentives.

But fear not, a little blood-letting might actually be good: “Short-term negative growth is good for the industry restructuring and mergers which the government is calling for. Meanwhile, the fierce competition will help improve the quality and technology of the vehicles, as well as the management and operation of the automakers,” said Rao Da, according to the China Business News. “It should be a good opportunity for China to strengthen the automobile industry.”

His colleague Cui Dongshu, vice-secretary-general of the National Passenger Car Information Exchange Association is a little less pessimistic: “The change in policies makes us lower our anticipation for this year’s automobile market from the previous 10 to 15 percent year-on-year growth to no more than 8 percent.” As a just-in-case, he added: “And the serious excessive consumption in 2010 even may lead to zero or negative growth this year.” So there you have it: Either 8 percent growth. Or not.

My belief is they are hedging. The tax incentive was on small vehicles below 1.6 liters. This segment boasts a market share of more than 60 percent. In 2009, these cars enjoyed a preferential tax treatment. Tax was only 5 percent. A lot of them were sold. In 2010, the tax was raised to 7.5 percent, and a slowdown of the market was prognosticated. Instead, even more were sold, and the Chinese market grew to a record-setting 18 million. This year, the tax goes to 10 percent.

On cars that cost $5,000 or less, 2.5 percent is no big deal ($125 on $5000.) In anticipation of the tax hike, there was some pull-forward. That should be out of the market after the first one or two quarters. China has a very low car density (60 per thousand, or less), people are making more money, and they want cars. Even in Beijing, where serious curbs are in effect, people did not lose their appetite for automobiles: The 240,000 new cars available for registration this year are already oversubscribed.

China’s largest manufacturers, from Volkswagen to General Motors, share this opinion. GM China’s Kevin Wale is budgeting for 10 to 15 percent growth this year. And Volkswagen is building two new factories. Both aren’t very much exposed in the below 1.6 liter segment anyway. If that segment really tanks, then the” industry restructuring and mergers” will hit the homegrown Chinese companies.

January 2010 had been an amazing month. Sales had gone up 126 percent to 1.66 million units. That will be a tough one to beat. January, the month before the Chinese New Year, is a key month. In 3 weeks, we’ll have an idea how the rest of the year will look like.