GM General Motors Company

SHANGHAI -- China's car market grew at its fastest pace in 3 1/2 years in July, driven by a tax break and on comparative weakness in the year-earlier period, but industry participants warned of downward risks ahead.

Foreign and domestic auto makers shipped 1.6 million cars -- sedans, sport-utility-vehicles and minivans -- to dealers last month, 26% more than a year earlier, the China Association of Automobile Manufacturers said Friday. July was the third consecutive month in which sales grew at a double-digit rate.

July's gain, which was strongest since January 2013, came as no surprise, as it largely reflected weak results in the year-earlier period when a plunging stock market eroded household wealth. After car sales fell three months in a row, China in October halved the purchase tax on small-engine vehicles to 5%.

The tax reduction has had the desired effect. In the first seven months of this year, auto makers sold 12.65 million cars, up 11% from a year earlier.

With the tax break due to expire at the end of the year, many dealers have put countdown timers on their websites or stores to encourage consumers to buy cars sooner rather than later. According to the China Automobile Dealers Association, its index measuring inventories fell to a one-year low in July, signaling quickening demand.

Despite robust headline numbers, the manufacturers' group warned Friday that China's lackluster economy could put downward pressure on the car industry. Recent economic indicators ranging from consumer inflation to investment and industry profit all point to a further slowdown in the economy in the second half.

Industry participants and analysts have also voiced concerns that the tax break has pulled future demand forward as buyers rush to benefit before it expires. "We are concerned that pre-buying could cause a meaningful pull back in demand in the first half of 2017," said Robin Zhu, an analyst at Sanford C. Bernstein.

Volkswagen AG's China President Jochem Heizmann said at a recent briefing that he was "more unsure as to what will happen next year."

In July, SUVs and crossovers remained the biggest winner in terms of growth. More than 580,000 SUVs and crossovers were sold in China, 47% more than a year earlier, according to the manufacturers' group. It maintains its forecast of a 6.1% rise in total motor-vehicle sales this year. Year to date, 14.7 million motor vehicles including cars, trucks and buses have been sold, 9.8% more than the year prior.

Among major auto makers, which report sales to consumers rather than deliveries to dealers, General Motors Co. sold about 270,530 vehicles last month, up 18% from a year earlier. Ford Motor Co. sales rose 15%, to 88,190 vehicles. Nissan Motor Co.'s sales grew 8.9%, to 91,700 vehicles. Toyota Motor Corp.'s sales rose 5.7% to 97,700 cars. Volkswagen group, the largest foreign car maker in China, has yet to report its China sales.

Rose Yu and Lilian Lin

(END) Dow Jones Newswires

August 13, 2016 02:48 ET (06:48 GMT)

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