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Car Market--Experiencing Cold Snap in Hot Season

Car sales have slipped to a two year low during China's hottest season. Why is the industry experiencing a cold snap now? Does it indicate that the country's car market could be declining? Biz China provide in-depth analysis.    
A: Hello and welcome to Biz China, our weekly business guide on China Radio International. I'm Zhao Yang in Beijing.

B: I'm Lin Shaowen.

A: We've got a lot of business highlights of the past week,Shaowen?

B: China's gross domestic product is up 9.7 percent in the first half of this year, compared with the same period last year.

A: China Netcom, the country's No. two fixed-line phone firm, aims to launch its US$1.5 billion  IPO in Hong Kong and New York as early as September.

B: China's second largest lender, the Bank of China, has become the official banking partner of the 2008 Beijing Olympic Games.

The Bank of China refuses to disclose the amount of money involved in the sponsorship, but says it will provide sufficient financing and other forms of support for the 2008 Olympics and Paralympics, including support for the Chinese Olympic Committee as well as Chinese sports delegations.

A: Hong Kong individuals are allowed to directly invest in both the Shanghai and Shenzhen A-share markets. Previously, they were only allowed to invest in mainland companies through B-share and H-share markets.
The Hang Seng Bank will be the first bank in Hong Kong to offer A-share investment services to local individuals, enabling them to directly trade A shares and transferable debts on both the Shanghai and Shenzhen stock markets.

B: Still in finance. Europe's largest insurer, Allianz AG, plans to start selling auto insurance policies in China, becoming one of the first foreign companies to offer the service in the country.

The German company may offer policies in the southern province of Guangdong as early as the end of this year once it wins government approval.

B: It's a scorching hot summer in Beijing!

A: Well, it might be the hottest time here weather wise, but things are lukewarm at best for the automobile market.

B: Right. But do you remember, just about a month ago, how the Beijing International Vehicles Expo was full of excited people dribbling over the latest models and looking to buy one?

A: That's true, but deceptive. Figures from the China Association of Automobile Manufacturers show that the growth in car sales slipped to its lowest level in two years last month, from over 60% to less than 30%. And though various efforts have been made to revitalize the market, including massive price cuts, it seems consumers are still reluctant to commit to buying.

B: So what's happening in the car market, and what are the reasons behind it, ZY?

A: Well, YBY is also curious about this phenomenon, so he spoke with a few would-be buyers and business insiders to find out.

Reporter: 35 degrees Centigrade on a mid-summer's day in Beijing; it's the hottest time of the year here. Too hot? Maybe that's the reason there are so few people browsing around the Yayuncun Automobile market, the largest in the city.

One of them is a Mr. Ma, a local Beijinger.

"I'm just taking a look. Cars are already much cheaper, but I'm just taking a look."

Thousands of cars are sitting in the complex waiting for new owners. But with so few people coming to look at cars, the salespeople are looking pretty bored.

Everywhere you look there are sings announcing price cuts, but it doesn't seem to have had the desired effect. I found a few young couples checking out new cars in the first hour or so, but are they prepared to open their wallets?

"I can see the market is very slow, and the prices are lower. But I'm still not sure if I should spend my money. And I think most people would rather spend less money on cheaper cars like this, not those luxury models."
Figures from the State Information Center show that over 100,000 new passenger cars manufactured in China remain unsold. This is because the manufacturers had overly optimistic expectations for this year. Qie Xiaogang, director of the Yayuncun Automobile market, say the situation has been getting worse for several months.

"The market has been deteriorating since April, and now it has reached its lowest point. Yayuncun is a typical example in Beijing. But our survey in another 10 big cities shows their car sales situation is almost as bad."
Just one month ago, the Beijing Auto Expo seemed to have opened a new world for local people, and relaxed controls on import permits led to the appearance of more cut-price foreign cars in China. But all this has failed to boost the market.

Car dealers say this is because most people who can afford a private car have already got what they want in the past two years. But economists seem to have a different view. Here is Professor Sun Yi from People's University in Beijing.

"First, I think the macro-adjustment policy drawn up early this year seems to be working. Fixed assets investments have been limited, and overheated industries such as real estate have been reined in. Secondly, bank loans are difficult to obtain for many would-be car buyers, as many of them have problems in paying their mortgages. And finally, consumers are waiting for the quota on imported cars to be removed next year, and the tariffs cut. That's why a lot of would-be buyers still have a wait-and-see attitude."

Analysts say consumers are no longer as anxious as they were a few years ago. The situation may be a little better later this year if consumers believe there isn't much more room for price cutting. But one thing is for sure, the car market in China has become a buyer's market.

B: So ZY, since you have kept an eye on the automobile sector for a long time, what do you think are the main reasons for the slowdown in car sales growth?

A: Well, Peichun, that's a good question. In fact, growth in China's car sales slowed to a two-year low in June, last month. I think the main reason is that, despite the price cuts, lending curbs are dampening consumer interest.

We know that vehicles sales had been accelerating in China in recent years, what with the increased availability of car loans and the proliferation of dealerships across the country. Car sales growth even reached over 75% year on year in February.

B: Yes, it's a phenomenal rate. But growth figures have since revealed a downward trend - I've got the numbers here - let's see: 59% in March, 38% in April and 18% in May.
A: That's more like a plunge than a trend! Let me go back to price cuts. You'd think rock bottom prices would encourage people to buy, and to some extent they obviously do, but the other side of the coin is that many potential buyers have been spooked by the aggressive price cuts by manufacturers and dealers, and worry that their investment in a set of wheels may depreciate soon after purchase. And some buyers are waiting for new products, as car-makers launch more models catering to a wider customer base, and at the same time are slashing prices of older models in the process, so there's reason to believe the rock-bottom prices I mentioned just now are ….. what's lower than rock bottom, Peichun?

B: I dunno. Hard rock bottom? But there's more to the story: Merrill Lynch analyst Grace Mak cautions against reading too much into flat growth figures. She says May and June are traditionally slow, and sales tend to pick up between September and December. She doesn't think consumers are totally out of the market; they are just taking a wait-and-see attitude.

A: Yes, so her take is kind of optimistic. But I talked with different auto analysts and consultants and found some of them are less optimistic. Here's Beijing-based Geoff Liu, chief representative of industry consultants Automotive Resources Asia.

"I think it's difficult to forecast when growth will pick up, after two years of super 60, 70% growth, a slowdown is very natural."

He even compared the car market now with the securities market, saying that frequent price cuts are scaring people off, since everybody knows Chinese car prices are still high. The car market is similar to the share market, because nobody knows when it will bottom out.

But with so many international car giants competing for the fast-growing market, is the cake still big enough? And will there be another round of explosive growth in the near future? Let's hear what Geoff Liu has to say.

B: And from your talks with Geoff, I've noticed that the government's attempts to cool the economy by reining in credit are taking a heavy toll on car sales. Why is that?
A: I think you raised another important problem - auto financing. Banks are rejecting more loans after tightening their risk-profile criteria, and a buyer now waits 10 days to two weeks for a lender to process a car loan application, compared with just a few days in the past.

B: I read that loan-financed car sales used to account for 20-30% of the market in China. Now that figure has dropped to 10-20%, and for some makes only 5%. But why are Chinese commercial banks so eager to raise their thresholds for auto loans, when car-financing is a core business that banks are competing with to attract customers?

A: Well, you're not the only one who has this question, so our reporter NY tries to find the answer.
Reporter: Facing an increasing number of defaults in payments on automobile loans, China's major commercial banks are revising their lending policies for the potentially lucrative market.

Raising down-payment requirements and shortening loan terms are their major solutions, and some bank branches have reportedly even told their loan clerks to suspend granting certain high-risk consumer loans for cars. But why is that? A senior auto loan manager from one of the country's four state-owned commercial banks, who declined to give her name, ha this to say.

"The credibility of many borrowers was just terrible, and the lack of an effective credit system has left us vulnerable. That's why we raised the threshold."
The down-payment requirement has been raised from a typical 20% to 40 or 50% at some banks, while the loan duration has also been shortened to three years from five years.

Some banks have also introduced stricter loan guarantee requirements, securing the loans against other properties in addition to the car.

The Bank of China said some 2% of their auto consumer loans had gone sour, higher than other consumer loan items such as housing and education. The Agricultural Bank of China said their bad loan ratio for cars is above 3%.

B: Well, Chinese banks started to grant consumer loans only a few years ago to finance the purchases of cars, housing and even home appliances. These loans were seen as helpful in improving the banks' traditional loan structure and the result was rapid growth.

A: But risk levels in auto loans rose, as many borrowers, seeing their cars depreciating rapidly as competition drove down prices, simply chose not to repay the money they had borrowed.

Professor Sun Yi from Renmin University says the sweeping price cuts, some as deep as 15%, had contributed to loan defaults. But an incomplete registration system, as well as a lack of personal credit records, has made it more difficult for the banks to repossess vehicles.

"Banks lack necessary legal protection, and most of the time they are not able to retrieve cars in the event of a defaulted loan."

B: In fact, the unexpected high risk has already forced many insurance companies to suspend providing coverage for auto loans last year. Some analysts say domestic banks may finally surrender the market to foreign auto financing firms that are more experienced in dealing with car buyers, although not everyone is sure that this how things will turn out.
(CRI July 20, 2004)

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