China's Case of the Missing Cars

A recent article in the China Daily champions China’s position as the largest car making country in the world and states China auto sales may touch 11m in 2009. Certainly SAIC-GM, FAW-VW, Shanghai Volkswagen and domestic manufacturers are all churning out record numbers of cars.

At the same time, though prices vary from city to city, it is fair to say China’s housing market which is said to have dropped 20% since this time last year has largely made that back up this year as prices have rebounded.

All in all China looks in robust health and set to resume its place as the engine of world growth just as soon as the rest of the world gets its act together ” right? Well we hate to be Doubting Thomas’s but well we have our doubts. Those house sales have been supported by easy loans and reduced interest rates. That is a phenomenon that the government could keep in place for some time, years possibly providing the housing market doesn’t begin to overheat again. But exports are still down, by 20% year over year according to the well respected Brad Setser, ignoring the fact the market added another 30% in Q3 2008.

There are some apparently contradictory numbers coming out of China at the moment. Take those car sales as an example. Our man on the ground tells us BYD, a noted Chinese car maker, reported 30,000 car sales of one model by end of last year, but the number plate agency recorded only 10,000 new cars of that model registered for use on the road. What happened to the other 20,000 are they running around without number plates? In a police state, I don’t think so. Our understanding is auto sales are recorded in China when they leave the factory, not when they are registered on the road, so dealers can build up inventory while car sales are rising.

Coming back to Mr. Setser in a fine analysis on the impact of a fall in China’s exports he explores the apparent dichotomy of falling electricity consumption, falling industrial production and yet rising GDP. Even Mr. Setser wasn’t able to conclusively get to the bottom of that one although his overall conclusion was that the economy was growing and it must largely be on the back of domestic consumption as exports and employment remain depressed.

These disconnects call into question our tendency to take official proclamations at face value, and we should also be careful about taking one or two months data and extrapolating that to a longer term trend. In a market so heavily influenced by state controls, a short term trend can be the distorted result of government actions rather than the more reliable measure of a sum of company actions taken over an unfettered economy. Growing China certainly is a trend, but how comprehensively across the economy and how sustainably remains to be seen.

–Stuart Burns

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  • The comment about car sales vs. car registrations is intriguing. Any way to countercheck this regarding a few other brands? (Maybe BYD is struggling and wants to show that it’s keeping up with the competition…)

  • Thanks Thomas, that’s an interesting point, we will do a little digging and see what we can turn up.

  • Well, one thing worth a second thought is that China, as a totalitarian kleptocracy, misallocates capital in a particular way: instead of the profits of new enterprises getting spread around to lots of individual property owners and entrepreneurs, it is concentrated in the hands of a few powerful people. When the profits are spread widely, a much larger fraction gets immediately consumed, whereas when it is concentrated the major fraction ends up “parked” in treasury bonds, etc. The flip side of that coin is that the labor of the Chinese has to go into export goods because that gets the foreign currency to finance the kleptocrats investment priorities.

    Another way to look at this is that China is very much ripe for increases in pay for Chinese people, which would increase Chinese demand for the things that Chinese people make. Or still another perspective: the party leadership could take some of the export profits that they have been giving to foreigners to finance the foreigners’ purchases of Chinese-made goods and instead give them to Chinese people to purchase Chinese-made goods.

    My point is that 1) China is clearly trying to manage some sort of “soft landing” transition to a market economy, so we should expect to see this movement in this direction, and 2) they are so far away from that goal and also it’s such a huge place that even modest moves towards a less totalitarian investment allocation schema will produce some fairly large shifts.

    So, yeah, they are probably lying about the size of domestic demand growth, but on the other hand, we should be seeing growth and it’s more an exaggeration than an outright lie.

    I mean let’s get real here — it’s just crazy to have a world where it is economically viable to ship Happy Meal toys across an ocean when there are hundreds of millions of little children who live (relatively speaking) right next door to the factories where they are made.

  • Foreign trade comprises 60% of China GDP. With the US & European economies in recession – Chinese factories are not getting export orders and many have closed. It is common for govt officials to doctor the statistics for their industries or states that they are responsible for as a “poor” numbers that are not in keeping with central govt’s directions will cause them their promotion or their job. I will not be surprised if China has zero growth in 2009 based on the performance in the real economy.


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