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Challenges reshape domestic market
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After eight months of sluggish growth in China's automotive industry, expectations for a major turnaround are growing - but a look at economic conditions in China does not make it clear why.

With little good news on the economic front, the optimism can only be attributed to a confidence in government efforts to manage the economy and the industry.

From stimulating demand to promoting a technological transformation, Beijing is indeed drawing extensively from its policy toolbox to stimulate and shape China's automotive industry. What impact is government having on China's automotive industry?

A main focus for government policymakers is on the economy and stimulating vehicle demand. While vehicle demand grew by 8 percent in 2008, it fell dramatically in the second half of the year, with the industry posting negative growth in four of the final six months of the year.

Heading into 2009, China's government confidently set a growth target for the automotive industry at 8 percent for the year. Given the prevailing economic conditions, it is hard to see how the industry can meet this target. Our current forecast at JD Power Asia Pacific is for a 1 percent to 2 percent decline in sales of light vehicles. We expect full year sales to reach approximately 8.5 million units. Passenger vehicles are projected to total 5.8 million units, including imported vehicles.

In making our assessment, we look most notably at China's trade sector. Much of China's income growth over the past two decades stems directly from the country's success in exporting manufactured goods to the world. Two factors - foreign direct investment that goes into the construction of the export production facilities and the multiplier effect of both the invested funds and the earnings from export ventures - contributed significantly to China's growth up through October 2008.

In dramatic fashion, the world has changed. China's key trade partners are suffering from a re-balancing of their economies. For too long the United States borrowed vast sums of money from China and others to sustain a level of consumption that its output could not sustain. The borrowed funds in many cases were sent back to China to pay for Chinese exports, and Chinese exports grew. Most readers are likely familiar with this story.

Since the fourth quarter of 2007, the US economy has been contracting, not growing, and China is now reeling from such a close relationship with that country. China recorded merchandise exports figures down 26 percent year-on-year in February, compared to an average 20 percent growth during the first 10 months of 2008.

And the multiplier effect is now at work in reverse. Factory closures are rising in the coastal areas leading to an estimated 20 million job losses among migrant workers and factory managers. China's GDP grew by 6.8 percent in the fourth quarter of 2008, the slowest pace of development in more than a decade.

In our view, a reversal of fortunes in the US economy and other key export markets remains beyond our vision. And the negative impact on China's economy will remain through 2009.

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