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China’s auto market goes ex-growth

Chemical companies, Consumer demand, Economic growth
By Paul Hodges on 10-Aug-2011

China auto Aug11.pngChina’s auto market has gone ex-growth, as the above chart shows. Monthly sales in July (red square) were the 2nd lowest since July 2010.

The problem is the continuing fall-out from the end of China’s great credit bubble. Inflation hit a new high of 6.5% in July. More importantly, food prices rose by 14.8%, up from 14.4% in June.

This would be bad enough in the West, where average incomes are ~$40k/year. But China is a relatively poor country:

• Average urban household income was $2810 last year
• Average rural household income was just $870

Food and energy costs therefore take up a very high proportion of ordinary people’s income.

This means China will have to do more to control inflation. Bank lending, the main agent of growth since 2008, will have to be further reduced. In turn, the government will therefore likely aim to preserve jobs via increasing exports again.

This is already emerging as a key risk in auto markets, as the blog will discuss tomorrow.