At this time of year, China's passenger car dealers normally bask in a warm autumn glow, with September and October being the country's two best months for auto sales.

But, this year is different. The chilling winds of the global credit crisis, inflation and sinking consumer confidence are being felt on dealers' forecourts across the land.

China's passenger car sales fell in August from a year earlier, the first monthly decline in more than two years.

According to China Association of Automobile Manufacturers (CAAM), 451,300 cars were sold in the world's second-largest auto market in August, down 6.24 percent year-on-year.

Earlier this month, CAAM reported that sales continued to slide in September, with the monthly figure falling 1.44 percent from a year earlier to 552,800 units.

Sales growth in the sedan segment cooled from more than 20 percent in the first quarter to 10 percent in the second quarter.

"Too many adverse factors are putting a damper on auto sales this year," says Hui Yumei, an analyst from auto research firm Sinotrust.

"The readjusted vehicle purchase tax and higher fuel prices can be blamed for the unusual slowdown, as well as consumers delaying their purchases because of the expectation of a price cut after the Anti-Monopoly Law was implemented in August and their flagging enthusiasm in the slumping stock market," says Hui. "The Beijing Olympics also kept potential purchasers from showrooms."

Fuel prices rose on two occasions in the past few months, first in June by 20 percent and on October 7 by a further 4 percent in Beijing, in a bid to cut oil consumption and tackle pollution.

And, in an effort to drive more potential buyers away from huge gas-guzzlers, in September the central government hiked the sales tax on big cars, while cutting the levy on smaller vehicles, in an effort to curb fuel consumption and control emissions.

The tax on passenger vehicles with engines bigger than 4 liters was raised from 20 to 40 percent, while it was cut from 25 to 15 percent for vehicles with engines between 3 and 4 liters.

To encourage purchases of small vehicles, the tax on cars with an engine size at or less than 1 liter fell from 3 to 1 percent.

However, the government's supposed shot in the arm for sales of smaller autos appears to be a bit of a damp squib.

In August, the market share for passenger cars with engines at or smaller than 1 liter was a mere 7.67 percent.

Jin Yibo, a spokesman for Chery Auto Group, explains that the tax adjustment only cuts the price of more fuel-efficient cars by several hundred yuan, not enough to convince customers that smaller is necessarily beautiful.

The unexpected slowdown in sales has had an obvious impact on the market.

Mazda Motor Corp last month halved its sales forecast at a Chinese venture selling compact cars, admitting it goals were too high.

According to CAAM, passenger vehicles sales in the first half of the year stood at 3.6 million units, 17.07 percent up from the same period last year.

Inventories of unsold new vehicles in China rose about 50 percent to a four-year high at the end of June, as sales growth slowed unexpectedly while automakers boosted output.

The backlog reached 170,000 vehicles at the end of June, the highest since the previous peak of 200,000 at the end of June 2004, according to China Securities Journal, which quoted Cheng Xiaodong, chief auto analyst with the price monitoring center at the National Development and Reform Commission.

"The fuel price hike, the slowing economy and the rising vehicle purchase tax mean that I'm not optimistic about a recovery in car sales in October," says Rao Da, secretary-general of the China Passenger Car Association.

"A decline is very likely in the first half of 2009, but things could improve in the second half as government moves to relax monetary policy gradually take effect," Rao says in a research report released this month. He cut his estimate for 2008 China car sales growth to 5-6 percent, from 6-8 percent last month.

"We have to say goodbye to the 20 percent-plus growth rate and our expectation that sales and production this year will break the 10-million-unit barrier," says Jia Xinguang, an independent auto analyst based in Beijing.

"Production in the first eight months, 6.54 million units, still lags behind the 10 million target by 3.45 million units, which means the goal can only be reached if production exceeds 862,500 units in each of the coming four months. However, this seems to be impossible," says Jia.

He forecasts 8 percent growth this year, with production reaching 9.5 to 9.6 million units, up from 8.88 million units last year.

While China still accounts for much of the sales increase for the global players to make up for their slack in the West, analysts are unanimous in stating that this is the end of China's era of more than 20 percent annual growth in passenger cars sales.

China's auto industry has applied the brakes to a certain extent, but its growth rate - expected to range from 10 to 15 percent between 2009 and 2015 - is still much faster than the global average.

But Gao Heng, an independent auto analyst based in Beijing, warns: "Sales may be dented further from the first half of next year to 2010, particularly if the credit turmoil continues to slow China's economy and the oil price goes up more."

Weakening market

Mei Xinyu, a researcher at the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce, says that this round of credit turmoil, the most serious economic crisis in the US since 1929, will have a serious impact on the real estate and automobile industries.

Last month, US auto sales dipped 27 percent, the worst performance in 17 years.

On October 10, General Motors' share price tumbled to US$4, the lowest in 60 years. On the same day, rival Ford's shares ended at US$1.99, the lowest in 26 years.

JD Power warned on October 9 that GM and Ford are in the danger of collapsing in 2009.

However, China, the world's No 2 auto marketplace, is still offering US automakers growth opportunities.

In the first nine months of 2008, GM sold 830,480 vehicles in the nation, up 10.2 percent from the same period in 2007, remaining on track for double-digit sales growth this year.

Analysts say they do not believe that the US credit crisis will have as much of an impact on Chinese automakers as it is on their US counterparts.

"The crisis won't impact directly on China's auto industry. Currently, the credit crisis is having more of an effect on China's auto parts industry, as a result of their big exports to the US," says Xu Changming, an auto analyst with the State Information Center.

But "if the crisis continues to strike the economy in emerging auto markets that are China-made vehicles' main overseas destinations, such as Russia, Middle East and Africa, vehicle exports will face a big hit," adds Li Chunbo, an analyst with CITIC Securities.

"The credit crisis will undoubtedly impact on consumption and investment in China's auto industry in the long-term," says Dong Jianhua, an analyst with Southwest Securities.

"The financial crisis will seriously hurt consumer confidence, driving down demand in the auto market. Then it will influence production and investment," says Dong.

(China Daily October 20, 2008)