China: Turning point for auto sales? – Standard Chartered

Analysts at Standard Chartered notes that China’s retail auto sales growth (in value terms) jumped 17.2% y/y in June, driven by clearance sales ahead of the introduction of a new emission standard in major cities from July.

Key Quotes

“Wholesale growth (in unit terms) fell 9.6% y/y, reflecting still-lacklustre demand. In the absence of a boost from demand, the rebound in June retail sales is likely to be offset by a decline in July-August. Meanwhile, our analysis of underlying trends suggests that the worst may be behind us, and growth in retail auto sales may resume from September, becoming less of a drag on overall retail sales. The number of cars sold may decline for a second consecutive year in 2019, according to our estimates, but growth is likely to turn positive in Q2-2020.”

“We see three factors underpinning a gradual recovery in auto sales: (1) The base effect will become supportive from September 2019; (2) Average selling prices (ASPs) may head higher in H2-2019 after the correction in H1; and (3) The inventory cycle is about to turn, as auto dealers’ inventory has fallen sharply after their aggressive promotions; also, auto producers are likely to start restocking in early 2020, after almost two years of destocking. Therefore, we believe auto sales and production will become less of a drag on retail sales and industrial production growth in H2.”

“The upside risk to our projection mainly comes from possible government policy support for car consumption, as well as a possible interest rate cut, while the downside risk could stem from uncertainty amid a slowing economy, as well as an escalation of the US-China trade war. Local governments may promote the upgrade of car consumption, but the possibility of resorting to a vehicle purchase tax cut is remote, in our view.”