China Car Sales Take Foot off the Gas

SHANGHAI—China sold 20% more new cars in October than the year before, the slowest pace of growth in four months as the rush by consumers to tap a tax break on vehicle purchases appeared to be leveling off.

Foreign and domestic car makers delivered 2.34 million passenger cars—including sedans, crossovers and minivans—to dealers last month, the government-backed China Association of Automobile Manufacturers said Thursday, up from 1.94 million units in the year-earlier period.

Sales in the world's largest car market have rebounded significantly since October last year when China's central government halved the 10% purchase tax on vehicles with 1.6-liter engines or smaller. The tax cut was in response to four straight months of slow sales. More than 70% of cars sold in China qualify for the incentive, which helps consumers save up to 10,000 yuan when buying a new vehicle.

The data illustrate the critical role government policy plays in China's car sales. October's growth was strong, but marked a significant slowdown compared with the previous three months, when auto sales rose at least 26% each month, underlining industry concerns that the tax break has largely pulled demand forward.

This could lead to flat growth next year. As U.S. auto sales are tapering off and other emerging markets are shrinking, a severe slowdown in China would add to a bleak outlook for the global auto industry, say analysts.

So far this year, China's new-car sales are at 19 million vehicles, a 15% increase from the same period a year earlier, when sales grew less than 4% from the year before.

Robin Zhu, a senior analyst with research firm Sanford C. Bernstein, said he expects China to continue to subsidize purchases of small vehicles, albeit at a smaller scale. He thinks the Chinese government will raise the purchase tax from 5% to 7.5% in 2017, he said, still below the original 10%. China has said the current tax break will expire by the end of December.

Fitch Ratings said it expects policy to remain supportive, especially if there is a risk of a demand slowdown. "The automotive industry is a pillar industry for the Chinese economy, and whose performance is critical to economic stability. The government would have multiple policy tools to boost car demand should there be a weakening in auto sales," said Fitch in a recent note.

Most car makers have reported rosy results for October. General Motors Co. said its China sales increased 5.7% year-over-year, Ford Motor Co. posted a 14% gain, and Nissan Motor Co.'s rose 16%. Chinese auto makers, whose consumers are more price sensitive, gained more. Great Wall Motor Co., China's biggest maker of crossovers, said its sales rose 20% year over year, and Geely Automobile Holding Ltd., whose parent owns Volvo Cars, almost doubled its sales from a year earlier.

As the year-end approaches, auto makers are quickening the pace of shipping vehicles to dealers in an effort to improve their sales revenue, causing an uptick in dealer inventories. According to the China Automobile Dealers Association, an index created by the trade group measuring inventories rose to the highest level since July in October.

Overall, sales of all motor vehicles, including cars, vans, buses and trucks, rose 19% from a year earlier to 2.65 million last month. Year to date, China's motor vehicle sales gained 14% to 22 million units.

-- Rose Yu

(END) Dow Jones Newswires

November 10, 2016 03:45 ET (08:45 GMT)

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