Followers of China's auto market have had a turbulent few months.
Last year was a record-breaker. Monthly sales, which first cracked the 2 million mark as recently as 2013, surged above 3 million in December. Still, pessimists were focused on what would happen in January, when the rollback of a tax discount for small-engined cars was expected to hit demand.
Sure enough, when January sales figures came out, they were up just 0.8 percent from a year earlier, compared with an average 14 percent pace of growth through 2016. Optimists' hopes were undimmed: The timing of Lunar New Year made January an unusually short sales month, and their confidence looked to have been validated when February data showed a respectable 9.2 percent growth rate for the two-month period.
The roller coaster hasn't stopped yet. Shares in China's big three auto dealers -- China Zhengtong Auto Services Holdings Ltd., Baoxin Auto Group Ltd. and China Yongda Automobiles Services Holdings Ltd. -- slumped between 5 percent and 7 percent Friday. Great Wall Motor Co., Guangzhou Automobile Group Co., and Geely Automobile Holdings Ltd. slipped closer to 10 percent.
The proximate reason was evidence that there may have been less to those good sales figures than meets the eye. Great Wall, the country's biggest maker of SUVs, on Thursday announced a 1 billion yuan ($145 million) discount promotion for its Haval cars. Chongqing Changan Automobile Co. had also started a "heavy" promotion campaign, Bin Wang, an analyst at Credit Suisse Group AG, wrote in a note.
Auto companies don't discount vehicles for the fun of it. Generally, it's a sign that there's too much stock around and they're trying to clear the overhang. Sure enough, an inventory alert compiled by the China Automobile Dealers Association, designed to show when too many unsold cars are sitting around in dealerships, has surged over the past few months. In December, it was at its lowest level in records dating back three years; last month was the second-highest reading.
The association went further Sunday, warning that sales from dealers had fallen in the first two months of the year, the first time that's happened since 2012. Inventory at independent brands such as Geely and Great Wall was at red-alert levels, with joint-venture brands such as BAIC Motor Corp. and SAIC Motor Corp. and imported marques also showing signs of oversupply.
That drop is perfectly consistent with the earlier data showing a 9.2 percent rise. Auto manufacturers book sales when their vehicles leave the factory, so their figures don't so much describe the state of consumer demand as the mood of car dealers. That mood appears to be worsening: Dealers for Volkswagen AG's Audi marque and Kia Motors Corp. have been demanding automakers compensate them for losses this year.
A divergence between manufacturers' and dealers' numbers, combined with signs of rising inventory levels and discounting drives by major manufacturers, are a clear warning that trouble lies ahead.
There are indications that this is starting to concern the government. Rules limiting sales of used cars will be loosened, the Ministry of Commerce said Thursday. In theory, that should encourage owners to upgrade and stimulate the new-car market, which makes up around two-thirds of auto sales compared with about one-third in the U.S.
That may not be enough to improve matters in the near term, especially as Chinese car manufacturers remain richly valued relative to global rivals. Chinese automakers with at least $5 billion in annual sales trade on a median forward price-earnings ratio of 9.9 times, versus 8.1 times elsewhere in the world.
That premium is built on expectations of higher demand growth than in markets such as the U.S., where automakers have been offering incentives of almost $4,000 a car to clear inventory. With China belatedly joining the discounting game, it looks like time for bulls to change down a gear.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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