China’s heavy-duty truck sales slipped 33 percent on a yearly basis to 244,300 units through to May. But the downturn seemed to have reached an end in June, and the market could rebound in the second half.
Three major reasons contributed to the gloomy market so far this year.
First, macroeconomic growth in the first quarter slowed to a historical low of 7 percent. Q2 growth could fall below 7 percent with the real economy at an even worse scenario. Sluggish manufacturing industry, especially the shrinking heavy industry such as coal mining and iron and steel also reduced demand for heavy-duty trucks.
Second, fixed assets investment growth also slowed through to May, with an increase of merely 11.4 percent, a historic low. Real estate investment grew only 5.1 percent. Shrinking infrastructure construction project hindered the usage of engineering trucks, which saw sales decline of 70 percent in the first five months.
Third, the heavy-duty truck industry was negatively impacted by multiple factors. Pre-purchase of State-III emissions standards-compliant trucks at the end of 2014 left over 30,000 inventories to be digested this year. Some customers are still holding a wait-and-see attitude due to the high price of State-IV emissions standards-compliant trucks as well as increased cost of AdBlue usage. Heavy-duty truck sales were high in the first half of 2014 and dropped in the second half, thus this year’s sales seemed more sluggish compared with the same period of last year.
Emissions upgrading has always led to sales slumps and the newly enforced State-IV emissions standards also hindered new vehicle sales. Monthly sales in the second half of 2008 were only around 10,000 units due to the upgrading to State-III emissions standards and the 33 percent decrease through May this year was not worst ever.
Moreover, the A-share stock market surge in the first half also lured investors to inject certain capital into the stock market and postponed the planning of vehicle upgrading or purchasing.
Multiple factors to trigger sales in second half
First, the government is endeavoring to improve the macroeconomy. Three meetings held recently, the Central Economic Working Conference, the executive meeting of the State Council, and the Standing Committee meeting of the Political Bureau of the CPC Central Committee all set growth stabilization as a top priority. The State Council, the Ministry of Finance (MOF), and the National Development and Reform Committee (NDRC) announced numerous measures on June 10 and 11 to boost the economy. The executive meeting of the State Council announced three measures to buoy the economy focusing on investment, consumption and export. For example, the government will recover the balance of funds and unused carried over funds for two consecutive years of local governments and departments and invest them into key construction projects. China will also expand consumer finance company pilot projects into the whole country and promote healthy and rapid growth of cross border e-commerce.
The MOF released the second batch of ¥1 trillion ($160 billion) replacement limit for existing debt of local government bonds, and the NDRC approved seven railway and airport infrastructure construction projects with total investment exceeding ¥120 billion. The NDRC approved projects valued at ¥570 billion in May with ¥450 billion valued projects approved within May 18-20. The projects are bound to start construction in the second half and will inevitably boost sales of heavy-duty trucks and machineries.
Economic indices in May also indicated higher economic growth in the second half with infrastructure investment back to normal level. Industrial production and total social retail sales saw higher growth in May, and sales of real estate were notably recovered. M2 money supply increased 10.8 percent in May, a rebound from April. The PMI index was 50.2 percent in May, a slight 0.1 percent growth on a monthly basis, indicating an expansion of the manufacturing industry.
Second, as the government starts to loosen the control of real estate, major infrastructure construction projects will start in the second half.
Total investment on real estate development was ¥3.23 trillion through to May, up 5.1 percent. Investment in May totaled ¥862.3 billion, up 2.4 percent on a yearly basis, and 1.9 percent higher than that of April. Commercial housing sales increased 24.3 percent in May with areas sold increasing 15 percent.
Paid-in investment, area of land acquisition, and newly started building area of real estate developers decreased 1.6, 16 and 31 percent through to May, all better than the first four months with declines narrowing 0.9, 1.3 and 1.7 percentage points respectively.
Third, as the State-IV emissions standards have been implemented for six months, the negative effects of the upgrading have been digested with heavy-duty truck inventory reduced remarkably compared with that at the beginning of the year, though still higher than normal level. As sales in 2014 were high in the first half and low in the second, this year tends to exhibit the exact opposite trend. New policies such as recovering balance of funds and carry-over funds and compressing financial budget of departments and regions with high balance of funds will trigger a new round of fixed assets investment and rally infrastructure construction.
Why not the first half?
Certain people still doubt about the steady growth of the second half and lack of confidence in the recovery of infrastructure project investment. “The government kept on reducing interest reserve requirement ratio and approving projects in the first half, why are infrastructure constructions still declining?” asked certain people.
Projects shelved in the first half were mainly due to anti-corruption campaigns of the government. Premier Li Keqiang vowed to revival infrastructure construction and claimed to allocate surplus capital into key projects this June.
The government also requested the banking system to ensure the follow-up loan of projects under construction of the local governments with ¥2 trillion debt replacement limit.
With the above supporting measures, heavy-duty truck sales in the second half are bound to surpass the same period of last year and fourth quarter sales could increase 20 percent.
(Rewritten by Jennifer Chen based on author’s article on find800.cn)