Is China's auto market about to slam on the brakes?

01/12/2011 2:20 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Looks like we’re headed to a car wreck in China—or at least something more seriouis than a fender bender.

On one side, speeding toward the intersection, is soaring demand for cars in China. Total vehicle sales (autos, trucks, busses) rose by 32% in 2010 to 18.06 million units.  Passenger car sales jumped by 33%, according to the China Association of Automobile Manufacturers. (For comparison, sales of cars and light trucks in the United States rose by 11% in 2010 to 11.6 million units.)

On the other side, heading to the intersection with just as much speed, are a truckload of measures designed to damp demand growth in 2011. From the central government these include an end to tax breaks and subsidies. For example, the national government has raised the sales tax on small cars to 10% from 7.5% and ended subsidies for rural residents to buy cars.

From local governments even more draconian measures include restrictions on the number of new license plates, auctions to raise the price of new license plates, and a freeze on car purchases by government offices, all designed to help reduce traffic congestion that is choking cities such as Beijing and Shanghai.

For example, on December 24 Beijing introduced a new lottery system for license plates that will cap new registrations for 2011 at 240,000. That’s a third of the 2010 level. In addition only potential buyers who have paid taxes and social insurance assessments for more than five years are eligible for a new registration. That will take about 10 million potential buyers out of the market. (Beijing had 4.7 million registered vehicles at the end of November.)

The end of subsidies and local anti-congestion measures will reduce growth in China’s auto sales to 10% to 15%, projects the China Association of Automobile Manufacturers. That would still leave total auto sales on a pace to reach 20 million in 20111, according to Nomura Holdings.

In comparison U.S. auto sales are forecast to hit 12.8 million to 13.5 million in 2011

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