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The global financial crisis and China’s auto market

The financial troubles that brought down Lehman Brothers, Washington Mutual, AIG, Fanny Mae and Freddy Mac., etc., were the results, in practical terms, that greedy investors in a free-wheeling financial system made tons of money that was in fact not there, according to a local analyst. And now the fake prosperity over the past 10 years has caught up with the entire country and system, triggering a global economic meltdown.

As if suddenly, the U.S. automobile market has grounded into a halt in output and sales. Light vehicle sales in September were down by an average of 26 percent, affecting not only GM, Ford and Chrysler, but also Japanese automakers such as Toyota and Nissan. In a recent forecast, J.D. Power & Associates once again reduced the 2008 U.S. vehicle sales total to 13.6 million instead of the 14.2 million it predicted in July.

Demand for automobiles in the U.S. slowed down in early 2008 due to rising oil prices. The recent credit crunch has quickly extended to automobile financing, which has been a mainstay for automobile sales in the U.S., contributing as much as 75 percent in sales value. The U.S. Big Three automakers are trying desperately to find ways of how to tide over the current financial and economic downturn. GM and Chrysler are in talks of a possible merger and Ford is considering selling its controlling stake in Mazda Motor.

The unraveling global financial crisis and the downturn of the North American and European automobile markets are taking a toll on the BRIC countries: Brazil, Russia, India and China. Brazil’s sales of automobiles slowed by 14 percentage points in August compared to July. Russia’s sales were down by 16 percentage points in August over July and August passenger vehicles sales in India were down by 4.3 percent compared with the same month in 2007.

China’s housing and automobile markets, two engines that have driven the rapid rise of the GDP, have slowed down considerably this year. Automobile sales in the first nine months were 7.23 million units. Although this represents a 12 percent increase over the same period of last year, the growth rate is down by almost 13 percentage points.

Over the past year or so, China’s economy has been plagued by rising material and energy prices, the appreciation of the RMB, a shrinking stock market and an inflated property market. The current global economic slowdown is further exacerbating China’s export decline, leading to large number of bankruptcies among export-oriented medium and small companies especially in the Yangtze River Delta and Pearl River Delta areas. 

As demand of global automobile sales declines, China’s export of automotive parts, especially those to the U.S. and the European Union, has been and will continue to be affected. Efforts of independent Chinese automakers in trying to export CBUs to the U.S. and Europe are likely to be delayed.

China is not a safe haven in the midst of the current global financial and economic crises. But the country has been better protected from the world financial meltdown due to its relatively independent financial and banking system. Economic growth will slow down as is indicated by the falling GDP growth in the third quarter, to only 9 percent. But to ensure a stable economy and spur domestic demand, the current government is making every effort to ensure an annual growth rate of the GDP to around 8 percent in the next 5-10 years.

If such will be the case, China’s automobile market is expected to grow at least no slower than the rate of GDP growth as is shown by historical data over the past 10 years. It is worth noting that the recent Party meeting decided to further privatize rural land ownership as part of the efforts in trying to double the average net income of rural residents by 2020. This would mean the creation of domestic consumption by adding about 1 percentage point to the GDP each year in the next 10-11 years.

Despite a relative slowed growth of China’s automobile market in the next year or so, the country will remain a growth market in years to come.

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