Car Sales Steady Despite China's Ownership Restrictions

TAIPEI ( TheStreet) -- After more than a decade of pushing vehicle owners to step on it, governments in China are now telling them to slow down.

China's auto industry still can't find the brake pedal but may finally let up on the gas, having a limited impact through year's end on foreign vehicle brands popular among Chinese motorists.

Here's what's going on: Eight Chinese cities will join an existing four in limiting purchases of private vehicles as a pollution control measure, the country's state-run media say, citing the China Association of Automobile Manufacturers.

That increase in urban private ownership restrictions might cut vehicle sales by 400,000, or 2% of total domestic sales, the China Daily newspaper says, citing association Deputy Secretary General Shi Jianhua.

But then Zacks Investment Research cites the same association as saying nationwide auto sales went up 11.2% last month, more than 9.8% in May.

Sales of cars, still powered by China's go-buy stimulus package in 2009, increased in June because prices came down. Lower prices "partially offset" vehicle purchase deterrents such as a credit shortage, the slowing Chinese economy and the very same restrictions on vehicle ownership, Zacks said in a commentary for Nasdaq.com on July 11.

Limited access to credit may have motivated car sellers to give discounts to clear stock and meet sales quotas, one industry analyst in Asia suggested.

American and Japanese brands have fared particularly well this year to date. Sales of American vehicles rose 12.7% to 1.8 million units in the first half of 2013 while vehicles made under the Japanese flag sold 16.5% higher, at 2.3 million units.

Ford ( F), General Motors ( GM), Toyota ( TM), Honda ( HMC) and Nissan ( NSANY) led that trend, Zacks says.

China encouraged its people to buy cars from the 1990s as proof of national wealth to the outside world. But since then it has faced mounting air pollution as well as legendary traffic gridlock (waiting four or five turns at a single signal) and a scramble for fuel sources from abroad.

Now the question is whether the widening net of vehicle ownership restrictions has caught up with these companies, and if so to what degree. It's hard to make a clear case either way yet. To look at it one way, Chinese cities have gotten more serious about controlling pollution and traffic congestion amid citizen complaints that increasingly tarnish the image of their leaders.

Inland cities are also joining their bigger coastal peers, which usually lead in safety and environmental rules. Smaller inland cities tend to get so bent on growth that they overlook quality of life side effects. But in on recent example, last month the city of Shijiazhuang, a newish boomtown 300 kilometers southwest of Beijing, said that from the end of the year it would stop households from buying a third car and in 2015 launch a license plate lottery.

Growing pressure against new motor vehicles is already reflected in the sales of bicycles by one of China's top offshore suppliers, Giant Manufacturing. Giant spokesman Jeffrey Sheu cites those curbs as one reason (along with cycling promotion and increased recreational spending) that Chinese customers helped increase its world sales from 5.77 million bikes in 2011 to 6.31 million in 2012.

But so what if a fraction of China's population is cycling or even if Chinese leaders have soot all over their faces? It's not like the public can throw them out of office under authoritarian rule.

That means government officials can afford to hedge on curbing motor vehicles, which obviously remain popular icons among China's growing urban middle class. Officials also want China's automotive industry to catch up with foreign manufacturers -- a tough plight as Chinese consumers often suspect that local brands of just about anything lag in quality.

The pollution-linked restrictions are expected to hit local automakers, China Daily says, quoting the China Automobile Dealers Association. Domestic brands will "suffer" in more cities and lose more market share while joint-venture and "high-end models" will be affected less, an association official is quoted saying.

To control pollution without hurting automakers, some Chinese cities such as the southern sprawl of Guangzhou are promoting use of hybrid or electric vehicles. Guangzhou also limits use of gas-powered vehicles, joining Beijing, Shanghai and Guiyang as the original four cities to impose restrictions.

But vehicle sales aren't expected to slow markedly, yet. Expect nationwide sales to grow through the end of 2013 but at a slower rate than before, says Yale Zhang, managing director of the Chinese market research firm Autoforesight Shanghai Co.

"The negative impacts from decisions by these cities will be long-term," Zhang says. So far, he adds, "It's hard to say what degree." Same for automaker stocks, he says.

At the time of publication the author had no position in any of the stocks mentioned.

Ralph Jennings is on LinkedIn.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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