China autos rebound takes hold with strong first-half sales

[July 11, 2016]  By Jake Spring and Meng Meng

BEIJING (Reuters) - Vehicle sales in China rose 8.1 percent in the first half of the year, the automakers association said, well ahead of full-year predictions with the industry cautiously optimistic that positive sales momentum will continue.

Vehicle sales growth in the world's largest auto market stalled last year as the economy slowed before rebounding strongly in October supported by a tax cut on small engine cars.

Many industry watchers questioned whether the rebound could be sustained, but analysts say sales so far this year have met or exceeded expectations.

"People are cautiously optimistic," said Godfrey Tsang, a consultant and former vice president for Lexus China.

Sales grew 14.6 percent in June, the China Association of Automobile Manufacturers told reporters on Monday, the highest monthly growth since December 2015.

Reflecting the strong start to the year, LMC Automotive last month raised its prediction for annual growth by 0.4 percentage points to 8 percent in passenger vehicle sales for 2016.

But other indicators show pressure remains high on dealers. An index produced by the China Automotive Dealers Association to measure inventories sits at the highest level since November.

With fierce competition among dealers, average discounts have been up to 3 percentage points higher in the first six months compared with the same period in 2015, according to Chinese consultancy WAYS.

TAX CUT EXPIRY

Analysts said the main uncertainty hanging over the market was whether the tax cut on cars with engines under 1.6 liters would expire or be extended.

If it expires as expected on Dec. 31, consumers may rush to buy cars this year to cash in on the incentive, at the expense of next year's sales, while extending the cut would push down fourth-quarter sales.

A ring road is congested with traffic in Beijing, China, in this November 18, 2015 file photo. REUTERS/Kim Kyung-Hoon/Files

The association said last month it favored making the tax cut permanent to promote fuel-efficient cars.

Association spokesman Chen Shihua said the tax cut would likely be extended if sales do not meet targets in the second half.

"Car sales would be volatile without the tax cut. Looking at H1, small engine cars have been the main driver of sales. If the government suspends this incentive, sales might drop a lot," Chen said.

The association reaffirmed its forecast that overall vehicle sales will grow 6 percent this year.

But with China's real estate market rebounding, the government will be less likely to turn to car sales incentives to push up GDP growth, said James Chao, Asia-Pacific chief for IHS Automotive.

Presuming the tax cut expires, IHS predicts sales growth will fall to 1.4 percent next year.

(Reporting by Jake Spring and Meng Meng; Editing by Stephen Coates and Jacqueline Wong)

[© 2016 Thomson Reuters. All rights reserved.]

Copyright 2016 Reuters. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.