By John Richardson
IT is the demand for loans that matters in China these days more than their supply, as chemicals markets have been telling us for over a month now.
And now, statistical back-up for our anecdotal evidence, that China's economy has turned an important and worrying corner, has been provided by a new Citi Investment Research report on the auto market.
"China growth has slowed sharply in recent quarters - from an annual GDP (gross domestic product) growth rate of almost 11% to just 8.5% currently, with the FY12 official target coming down to 7.5%," wrote the bank.
"China money supply has slowed sharply, and official loan targets, so easily exceeded in previous years, are now being missed on a monthly basis. It seems the demand for loans and investment in the Chinese economy has slowed sharply. Without this investment, China GDP should continue to slow."
China money supply growth growth
Source: Citi, Bloomberg
The construction market, one of the main reasons why chemicals and polymer demand growth was so strong in 2009-2010, continues to slow, said Citi. Growth in chemicals and polymers has now entered negative territory.
"China April construction data was weak. Although home sales declined a bit less than in previous months, sales of commercial property fell much more sharply, as did new starts and land sales," added the bank.
"Given that construction accounts for a large slice of the Chinese (or any emerging market) economy, these declines suggest GDP remains under pressure.
"The question is whether China policy stimulus (reserve requirement cuts and more) will once again save the day. We would be cautious for now."
And on the main theme of the report - autos - Citi said that sales in China had slowed sharply over recent months, driven by lower sales of commercial and light vehicles and by falling sales of locally produced vehicles.
Source: Citi, CAMA
"Generally speaking, mass OEM JV sales have remained flat year-on-year, and premium brand sales have sharply beaten the market. BMW has performed best of all.
"However, especially given the housing data, we fear that the best months are behind us on this front."
Interestingly, also, Citi raises a question mark over the conventional wisdom that there is still huge potential for further auto-ownership growth, particularly in the developed eastern region of China.
"Although (nationwide) ownership penetration in China remains low, at 60 cars per 1,000 drivers, annual sales have doubled since FY09 to around 24 per 1,000 drivers," continues Citi.
"This is similar to Brazil levels, and compares with around 40 in Europe or Japan.
"Given development variance between China east and west, this suggests China eastern annualised sales per 1,000 drivers are getting very close to Western levels already - even if the fleet remains small relative to the population."