Stimulus measures

We recognize the government is providing enormous stimulus to the domestic economy in an attempt to offset the downturn in exports. In addition to the 4 trillion yuan fiscal stimulus package - mostly infrastructure spending - it has unveiled plans to spend on the health care system, boost consumer spending in rural areas, and prop up the flagging property sector. The central bank has cut interest rates five times since September and lifted controls on bank lending.

These measures of course will help strengthen the economy. It's estimating the degree to which these measures turn things around that is troubling. Our current view is that these measures will deliver economic growth of 6.8 percent in 2009, a rate much slower than recent years.

From an automotive perspective, we believe the slower economic growth rate will hinder expansion of vehicle demand, leaving us at roughly the same levels experienced in 2008.

We are watching closely two other government measures that hold the potential to directly lift automotive demand beyond 2008 levels: Vehicle subsidies and support for vehicle finance.

By providing subsidies to rural buyers of light commercial vehicles, China addresses three distinct policy goals: support the growth in vehicle demand, support development in rural areas, and support the indigenous vehicle manufacturers.

In effect since March 1, the new policy is having an immediate impact on the automotive industry. We witnessed a dramatic rise in wholesale deliveries of light commercial vehicles in February as dealers anticipated a strong response to the policy, and built inventory. Volume jumped 50 percent over the previous year to 293,000 units. This represents a seasonally adjusted selling rate of 3.8 million units, much stronger than our current forecast.

The government budget of 5 billion yuan for the program would support the subsidy of 1 million light commercial vehicles. At this juncture we believe the subsidy will not create new demand for commercial vehicles as much as pull forward demand from future months.

Policymakers have not yet passed, but are considering measures to support automotive financing. A series of measures are focused on improving the regulation process and on the system for making approvals. Opening up vehicle financing would lift demand for passenger vehicle and could dramatically shift demand up.

In our view, China will take its time before moving on vehicle financing. Since 2004 China has chosen to restrict available credit for automotive purchase due to the difficulty in qualifying buyers, collecting payments, and tracking down delinquent payments. China's financial system remains inadequate in these areas. By opening financing before the system can handle it, China runs the risk of replacing the burden of weak vehicle demand with a rise in non-performing loans.

Smaller, more efficient

In addition to stimulating vehicle demand, Beijing is taking strong measures to shape vehicle demand. Struck by rising costs of imported fuel in the summer of 2008, China moved in September 2008 to adjust its consumption tax. By reducing the tax on small displacement engines and raising the tax on high displacement engines, China is encouraging the sale of smaller and more fuel-efficient vehicles. Enhancing the effect of the consumption tax, the purchase tax was reduced for engines below 1.6 liters.

These two policies have the added effect of supporting Chinese companies, which perform best in the small vehicle segments. Support for small fuel-efficient cars will continue to shape the structure of China's passenger vehicle market. Look for China's passenger vehicle demand to continue to grow fastest in smaller cars, and manufacturers to focus more attention on success through fuel efficiency in the coming years.

The recent slowdown in China is providing Beijing an opportunity to revise and reassert its vision for China's automotive industry as a main pillar of the country's economic development. Renewed efforts to consolidate the industry are underway. But for the near term, the main focus will be on stimulating demand.

John Bonnell is an analyst with research firm J.D. Power and Associates.

(China Daily April 20, 2009)