Its amazing what a lending bubble can do in the short-term, as the above chart shows. It updates my August post for the Financial Times, and highlights the astonishing rise in China’s bank lending since 2008 on the x-axis, and the remarkable rise in auto sales on the y-axis.
Official data shows average disposable income last year was just Rmb 20,167 ($3294). Clearly it was impossible for most people to buy a car out of income:
- Purple period, 2008, saw auto sales of 600,000/month and lending of Rmb 400 billion/month
- Blue period, 2009, of panic stimulus saw auto sales increase 50% and lending treble at one point
- Black period, 2010-2013, was more stable with auto sales at 1.4 million/month and lending Rmb 600 billion/month
But China’s New Normal policies meant, as expected, that the Brown period, 2014 was a year of two halves.
H1 saw auto sales at 1.6m/month, and lending at Rmb 950bn/month. But H2 saw auto sales stabilise at 1.6m/month and lending fall to Rmb 675bn/month. This might suggest that lending had become less important in driving auto sales.
But in fact, it highlights one key issue with China’s reporting of “auto sales”. They aren’t really “sales” at all on a Western definition, but instead record the shipment of sales to dealers. And as China’s auto dealer association noted,
“Unsold vehicles of all makes on dealer lots rose to the highest level in November since August 2013″ and “remained high” in December
This problem led dealers to demand, and get, major cash payments from auto manufacturers to cover their losses. BMW, for example, has had to pay out Rmb 5.1bn ($820m) to stop a revolt by its dealers. And in a statement, BMW justified the payment by noting that “a new normal is emerging in the country’s auto market“.
Further problems lie ahead. China’s official China Daily has reported that “all officials below ministerial level will no longer be provided with a car and driver” in order to reduce corruption. Officials will instead receive allowances of just Rmb 1300/month ($209) at central level, and up to a limit of Rmb 1690 at local level.
As a result, potentially millions of official cars will now need to be sold, with the first auctions underway this month.
THE GREAT UNWINDING IS THUS REACHING ITS SECOND STAGE IN CHINA
The Great Unwinding of policymaker stimulus began in China over 2 years ago, when the new leadership were appointed. It then gathered pace in March 2013, when President Xi was formally elected President. And its key policy directions were established in November 2013 at the critical economic plenum.
By February this year, the implications of the New Normal policies were crystal clear, as I described in my Research Note at the time – if you wanted to look. But change is difficult to handle, particularly on this scale. And understandably, most people prefered to pretend it wasn’t happening.
But 2015 seems likely to be the moment when the extent of the downturn in China’s auto sales growth becomes clear. This will be the ‘wake-up call’ for those who had wanted to believe the myth that the lending bubble had suddenly made China ‘middle class’.
Companies and investors now need to move very quickly to make up for lost time.