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New Stimulus Can’t Keep Chinese Auto Stocks at Top Speed

2019-01-10 16:23

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The wheels came off for Chinese car makers last year, with sales set for their first annual fall in almost three decades. A fresh stimulus package from Beijing would provide a short-term fix, but only by borrowing from the future.

Shares of Chinese auto companies jumped Wednesday after a senior official at China’s economic-planning ministry said measures to help the sector could be en route. Beijing could be gearing up to offer car buyers tax cuts or subsidies, as it did in 2015 and 2009; in 2009, as well as cutting vehicle-purchase taxes, it introduced a program similar to the Obama administration’s “cash for clunkers” to encourage rural citizens to buy new cars.

Similar policies will do less to rev up the market this time. That is mostly because the last tax break, which encouraged many buyers to bring forward purchases, expired only at the end of 2017. The market has also become much bigger: China now sells nearly 30 million cars in a year, more than twice the amount 10 years ago. And while car ownership in China is still much lower than in other developed countries, it has reached a point—160 cars per 1,000 people—beyond which growth will naturally become slower and more cyclical, according to Bernstein, based on comparing China to countries such as Japan and the U.S. at similar stages. Better infrastructure and a more concentrated urban population means car ownership in China will probably never be as widespread as in the U.S.

Beijing may feel it needs to try something, given that the car industry represents around 6% of China’s gross domestic product, according to Citi. But renewed stimulus measures will again merely pull forward demand, resulting in a bigger hangover down the road. The last tax break, from 2015 to 2017, frontloaded demand equivalent to 7.4 million units, Goldman Sachs estimates, or around 10% of car sales in the period.

A new stimulus package might also jolt car makers’ depressed shares higher in the near term—they fell by more than 40% last year. Longer term, investors should look to ride with Chinese auto stocks that have scale and strong tie-ups with foreign brands, such as industry leader SAIC Motor , a partner to General Motors and Volkswagen . Guangzhou Automobile, which makes cars under the Toyota and Honda brands, has been gaining market share, too. Shifting China’s car market back into top gear will be tricky, but some winners could yet emerge.

Source: The Wall Street Journal
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