Spiralling car sales put China's economy in a jam

ASIA BRIEFING:CHINA IS ENGAGED in a delicate balancing act right now. The economy is still growing, but at a markedly slower rate – data released last week showed that China's gross domestic product rose by 7.6 per cent in the second quarter of this year, the slowest rate of expansion in three years, as declining investment in the property market and weak exports cast a shadow over the world's second-largest economy.

If there is a single product that exemplifies how Chinese society has changed in the past few years, it is the passenger car, and the revolution in car ownership. Car production is a pillar industry, and the ruling Communist Party has been keen to foster ownership as it symbolises China’s advance.

To illustrate how the rise in the number of people driving their own cars has changed China in a fundamental way, picture the intersection between Dongdaqiao Road and Guanghua Road in downtown Beijing last week.

The traffic lights on the eastward-bound section of Guanghua Road turn green. Immediately, the line of cars taking a left turn starts to move, forcing the column of vehicles heading straight to stop. A man driving a flatbed tricycle has paused in the intersection, blocking the westward bound lane, while 70 or 80 pedestrians are taking the opportunity to cross in all directions because pedestrian lights are meaningless in Beijing anyway.

A Porsche Cayenne luxury sport-utility vehicle – there are three of these hulks involved in this particular traffic face-off, and China is Porsche’s largest market for the Cayenne – is inching forward, forcing the line of cars turning left to veer towards the oncoming line of vehicles on the other side of the road.

Sheer chaos. Twenty-five years ago, you would have seen a lot of bicycles, a few buses, and maybe a Jetta belonging to a government official.

While it is unlikely to provide much relief to those stuck at the Guanghua Road intersection, the economic slowdown is gradually translating into lower passenger car sales.

China’s passenger-vehicle sales for June rose 15.8 per cent from a year earlier to 1.28 million units, data showed last week, but that is based on a comparison with weak data from a year earlier. In the first half of the year, passenger-vehicle sales rose 7.1 per cent from a year earlier to 7.61 million units.

Overall sales, including those of passenger cars and commercial vehicles, grew 2.9 per cent in the first half from a year earlier to 9.6 million vehicles, according to data released last week by the China Association of Automobile Manufacturers (CAAM).

That compares with a 3.4 per cent gain in the previous year, and a whopping 48 per cent jump in the first half of 2010. Dealers are stuck with massive stock in the forecourt.

Some luxury brands such as BMW have 60 to 90 days of stock, compared with more normal levels of 30 to 45 days, despite big discounts and promotions from automakers such as Ford and Toyota.

There is recognition at government level that this kind of traffic makes it difficult to do business.

Also, the rise in the number of cars has made pollution in the cities a real problem.

The response from local authorities in the big cities has been to adopt policies to discourage auto sales. Since July 1st, Guangzhou – China’s southern export hub – began limiting sales. It is the fourth city in China, following Shanghai, Beijing and Guiyang, to cap car sales to ease chronic traffic congestion and pollution.

The Guangzhou local government said it would allow only a total of 120,000 new cars to be registered a year in the city of about 13 million people. Purchases typically exceed 300,000 a year.

The move is expected to cut passenger car sales by just one per cent, but it could be a trend that will make an impact in the longer term.

The phenomenal growth of the car industry has helped support economies such as Germany, which is heavily reliant on its VW brands’ success in China for ongoing economic wellbeing. General Motors has been heavily dependent on China to make up for flagging sales at home.

But there are questions being asked about the sustainability of the kind of traffic jam at Guanghua Road, and the balance might be shifting against the motor car.