China Auto Sales Point To Long-term Shift

By John Richardson

The impact of Chinese government policy adjustments on petrochemicals demand was further highlighted late last week, when auto-sales figures for January-February were released.

Sales declined by 4.4 percent, the worst two-month start for the industry in seven years, with local-brand sales falling by 17 percent.

This is sure to dampen the mood further in polypropylene (PP) markets, where naphtha-based exporters to China are in particular struggling to cope with high feedstock costs and lacklustre overall demand.

The slump in auto sales was attributed to high fuel prices.

However, there are other longer-term factors also at play here, which are likely to influence auto-sales growth over the next several years.

In its battle against inflation, traffic congestion and pollution, the government removed auto subsidies in 2011. The subsidies had caused an unsustainable spike in demand in 2009-2010, as was the case across many consumer-goods sectors.

The 12th Five-Year-Plan (2011-2015) involves encouraging the production of more fuel-efficient vehicles.

In addition, consolidation in an oversupplied auto sector is being promoted.

Overall policies designed to stimulate more sustainable growth are not going to be abandoned, and if anything, are likely to be further strengthened. This was re-emphasised by last week’s National People’s Congress.

In the short term, financial markets will get excited every time a statistic indicates the possibility of stronger growth in China.

Thus, the fall in February inflation to a 20-month low of 3.2 percent has been by some commentators as giving China more flexibility to stimulate the economy.

But such numbers are not going to change the overall economic direction towards a different kind of growth in China.

And, as always, looking behind short-term numbers is important.

In the case of inflation, the January-February average was 3.9 percent, only a fraction below the government’s annual target of 4 percent. Inflationary pressures are also expected to pick-up in H2, especially if oil prices remain firm.

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