China’s dance on a volcano

Dubious financial products stimulate the car market in the Middle Kingdom

In the first half of 2013 Chinese car manufacturers’ shipments to dealers were up 18 percent over the same period of the previous year. JSC Automotive, the consultancy specializing in the Chinese automotive market, expects growth to slow to an annualized rate of some 10 percent. In November, the Central Government will present the long-awaited catalog of economic measures to the party’s Central Committee. This will indicate whether China is serious about tackling restructuring of the economy. Such restructuring would have a great impact on the automotive market.

The Chinese economy is in recession. For example, capacity utilization across all industries is only 60 percent and producer prices have remained in negative territory for 18 months. Despite this, most manufacturers continued to increase vehicle production steadily over the first six months. The reason is that many provinces keep their industries afloat by means of subsidies, and households feel wealthy as the result of dubious financial products. “We assume that by the end of the year the Government will move to restrict financial products backed by doubtful assets and stem the flood of subsidies”, says Jochen Siebert, CEO of JSC Automotive. Analysts expect growth in production to drop substantially in the last months of the year as a result of the slower economy.

Tense wait for decisions in November

When it comes to future planning, automakers face great uncertainty. The current government demonstrates a strong will to restructure the economy and make China competitive in the long term. “As a first step, the Central Government is attempting to curb the power of local governments and to restrict their access to capital. One of the measures to achieve this was the deliberately induced liquidity squeeze in June,” explains Siebert. The Government has also announced the closure by September of some 1,400 factories that cause excessive pollution and whose capacities are not required. The ban on the construction of new government buildings over the next five years is in the same vein. This path cannot be taken without significant short-term adjustment measures: It would result in many companies becoming insolvent, all local governments having to tighten their belts, an increase in unemployment, and possibly even to a drop in real gross domestic product in 2014.

If a healthy recession of this kind took place, it would exert considerable pressure on the car market. From 2014 to 2015, the capacity of the automakers’ plants will increase by 4.4 million units. Currently, the average production capacity utilization of the international OEMs is an economically healthy 80 percent. If restructuring of the economy takes place, this value would decline to 60 percent, the prevailing average utilization rate in Europe in this time of crisis.

JSC automotive analysts believe there is a high probability that the Government will become nervous. In this case, restrictions on the real estate market would once again be lifted to stimulate the economy and boost the 30 related industries. “The premium automobile market would surge again immediately. But such new ‘good times’ would lead to a situation against which the current situation would pale in comparison and which, with relatively high probability, would lead to a financial crisis,” says Jochen Siebert, summing up the prospects.

JSC Automotive is a management consultancy specializing in the Chinese automotive market. Headquartered in Shanghai and Stuttgart, the company focuses on forecasting trends in the automotive market. In their forecasts, the analysts work with scenarios that take state economic and monetary policy, wage-level trends, changes in legislation, real estate market trends, income distribution, and population growth into account.