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China Passenger Vehicles Sales Likely to Decline in 2019 - Fitch Ratings

Auto News - Published on Tue, 25 Jun 2019

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China's passenger vehicle unit sales are likely to decline by low-single-digits in 2019, says Fitch Ratings in a new report. We lowered our forecast after year to date market performance trailed our previous forecast of roughly flat growth in 2019. A recovery in demand is likely to be mild in 2H19 on an extension of the grace period for 'China 5' vehicle registration and increased licence plate quotas in large cities.

Consumers pulling back on spending amid macroeconomic uncertainties and their anticipation of potential stimulus measures led to PV sales falling by 15.2% yoy in 5M19. Fifteen local governments said they would adopt early the 'China 6' emission standards with a short transition period. This exacerbated the demand/supply imbalance as some consumers avoided higher polluting 'China 5' vehicles due to potential obstacles of vehicle registration after July 1, shorter lifespan and lower residual value in second-hand markets, while newer 'China 6' vehicles were in short supply.

Fitch expects policy stimulus to help PV sales growth begin to pick up after a record low 2Q19. China's National Development and Reform Commission and other regulators released the 2019-2020 consumption upgrade stimulus measures in June 2019. These allowed local officials to relax purchase restrictions on internal combustion engine vehicles in nine major cities. Guangzhou and Shenzhen became the first movers in late May to increase their annual licence plate quotas for ICEVs. We think other cities may follow suit, although there could be some resistance from tier 1 cities with heavy traffic congestion.

Fitch estimates 200,000-250,000 additional PV unit sales in 2019, if the nine cities increase their ICEV licence quota by an average 25% in June-December 2019 from the full-year 2018 quota. This would represent about 1pp of China's total PV unit sales in 2018. The nine cities accounted for 13.5% of total PV sales in 2018. We think the policy stimulus will have limited impact on demand in lower-tier cities and rural areas where demand has been excessively pulled forward by tax incentives in 2015-2017.

Fitch expects Chinese automakers and dealers to remain under profit pressure in the near-term from the continued destocking of 'China 5' inventories. Dealers have suffered significant profit pressure from the destocking, but we expect manufacturers to repurchase some inventories and offer additional dealer subsidies to alleviate the strains on dealers' cash flows. Local regulators may consider extending the grace period for 'China 5' vehicle registration by one-three months, but retail discounts could stay deep as brands fight for incremental demand.

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Posted By : Mohan Sharma on Tue, 25 Jun 2019
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