China’s stimulus package for the auto industry has been all over the map. Measures that help some automakers wind up setting back priorities for others. But one thing is clear: The billions of yuan that vaulted China to become the world’s largest car market aren’t there. Don’t be fooled by the numbers you see in coming months.
All told, China’s aid package adds up to around 8 billion yuan ($1.13 billion), according to Goldman Sachs Group Inc. That’s a far cry from the 25 billion yuan to 30 billion yuan spent just on electric vehicle incentives last year, or the 100-billion-yuan-plus laid out in the 2015 to 2017 stimulus cycle. There’s a bigger problem than fiscal constraints, though. Beijing’s policies will do little to boost consumer demand and only add volume — exactly what a market awash in supply doesn’t need. Discretionary spending on big items such as cars is unlikely to top post-coronavirus shopping lists, even if people are initially wary of public transportation.
In recent weeks, policy makers have laid out a slew of measures to boost sales, which were slumping even before Covid-19. Subsidies that were supposed to end this year have been extended to 2022. The government is incentivizing auto companies in several provinces to meet sales targets and high growth rates, and urging them to offer sweeteners for bulk purchases. In other cities, such as Hangzhou, restrictions on license plates — aimed at curbing excessive sales — are being loosened and quotas expanded. Yet all this easing of limits on conventional cars has come at the cost of the drive toward greener ones. EV-specific policies have been lackluster.
The latest program looks a lot like the U.S.'s cash-for-clunkers experiment of 2009. In places such as Tianjin and Hebei, the central government is turning to vouchers and coupons instead of the usual subsidies. In Beijing, for instance, car owners can get 7,000 yuan this year, and a little less next year, for scrapping older, higher-emission models or transferring them out of the city. Local officials are also urging automakers to match or exceed government offers for shoppers who then go and buy new vehicles. In theory, this program cleans out old stock, encourages sales and makes people feel like they can start spending again. In the U.S., this ultimately backfired because it shifted demand to cheaper vehicles and reduced spending.
Most of the perks laid out, if they stick, will result in soaring sales and a steep recovery. (EV sales, meanwhile, will remain subdued.) Local brands such as Geely Automobile Holdings, SAIC Motor Corp., Guangzhou Automobile Group Co. and BYD Co. will likely post figures closer to those before the viral outbreak. But things will look good for all the wrong reasons.
For clues about the health of China’s auto market, investors may be better served looking elsewhere. Dealership traffic and sales of foreign, especially luxury, carmakers that stayed ahead of the broader market will be a clearer indication of demand. While 98.8 percent of dealers have re-opened and are aggressively luring consumers, showroom traffic is still around 66 percent of normal levels. The SAIC-General Motors Corp.-Wuling venture for instance, is subsidizing buyers with a targeted total amount of 1 billion yuan, according to CLSA. Last month, the company launched a no-questions-asked return policy within 30 days for the newly launched Baojun series.
Another area to watch is premium light-vehicle sales and pricing. Big luxury automakers haven’t been major beneficiaries partly because some of the perks are focused on lower-tier cities, where there are more joint ventures with foreign players that haven’t done so well. No one’s scrapping a Beemer anytime soon.
Since many of the incentives are coming from local governments, it will also be important to assess sales on a city-by-city or regional basis. Shanghai and Hangzhou are saturated markets — their ability to significantly boost purchases by loosening restrictions is much lower than areas in central and western China, where demand and sales may start rising a lot faster.
The other lever Beijing will lean on is household credit. While China relies less on auto financing than other countries, the sector is still growing quickly. The market for auto asset-backed securities, backed by pools of car loans, is also booming, so performance here will be key. Prepayments will be another tell-tale sign; who is paying and who isn't. Already, delinquency rates for some buyers are rising faster than others.
In the bust, boost and boom cycle of China’s car market, there will be more losers than winners — the glossy stimulus headlines won’t help you find them. It’ll take a bit more digging.