Car sales in China skidded 19.4 per cent in May from April, the second straight monthly decline, as efforts to apply the brakes to a racing economy and restrict easy auto loans kept potential buyers at bay.

Investors and economists have been watching the fast-growing auto industry for signs that China's recent steps to cool overheating sectors of the economy were taking effect.

But for market leaders such as Volkswagen AG and General Motors Corp the slide is a worrying sign that a production boom is outpacing demand.

A total of 177,500 cars rolled out of showrooms last month, down from 220,100 in April, the China Association of Automobile Manufacturers (CAAM) said last week.

Sales in April had already slipped 2.7 per cent from March.

"The main reason (for the fall) is because there's been a tightening of credit, of auto loans,'' said Christopher Lee of Standard & Poor's Asian Equity Research.

"Most consumers are taking a wait-and-see attitude towards buying cars."

Speculation of a 20-per-cent dive in May sales drove Hong Kong-listed auto stocks, such as Denway Motors Ltd and Brilliance China Automotive, sharply lower recently.

Brilliance was down 5 per cent last Tuesday afternoon and Denway was down 3 per cent, underperforming the market's slight fall.

Sales were still up 21 per cent versus May 2003. But growth is trending lower following a 38.2-per-cent rise in April from a year ago, and a 76.8-per-cent rise in February.

"The two major factors seem to be tighter control over auto loans, and the Beijing auto show," said Yale Zhang at auto consultancy CSM.

"People are waiting for new models to hit the market, and they also want to see what price cuts are coming.

"Plus, sales rocketed this time last year as people flocked to buy cars during the outbreak of SARS."

He was referring to the deadly severe acute respiratory syndrome (SARS) outbreak that drove people away from public transportation and to private vehicles.

Car sales tend to slow in May because of the week-long Labor Day break, but the fall was bigger than in previous years.

Last year, May sales slipped 6 per cent from April -- a smaller fall partly because of SARS outbreak.

May 2004 sales also fell short of the 215,100 cars produced in the same month by 37,600 automobiles -- nearly double April's shortfall.

That indicated inventories piled up.

The National Bureau of Statistics said last week manufacturers and distributors had about 103,000 unsold cars at the end of April, equivalent to about 16 days output.

That bodes ill for foreign carmakers, which are spending US$13 billion to triple annual capacity, to 6 million units, by the end of the decade.

Analysts have warned of a glut and price war.

"Because of the effect of the long Labor Day holiday, production and sales fell markedly from April," CAAM announced on its website, www.auto-stats.org.cn.

But it added: "Production is still growing quite fast."

Seeking Consumables

Market leaders Volkswagen and GM are planning to more than double capacity to some 3 million units by 2008, but say they are unworried by decelerating sales growth.

They say China's growth would still outpace mature markets such as the United States.

"Judging from what we know now, the next couple of months sales are probably going to be down," said Lee.

"If I took a 12-month view, I think maybe you'd see car sales picking up at the end of the year."

That could mean sales this year will grow 20 per cent over last year, he said, well below the 80-per-cent and 50-per-cent growth seen in the past two years, respectively.

Just over 2 million cars were sold in China last year, as a decade of strong economic growth put cash in the pockets of Chinese starved of consumables.

In the first five months of 2004, 964,700 cars were sold, up 37.7 per cent from the same period last year.

China is now restricting the amount of auto loans that commercial banks can offer, to douse an economy that grew 9.8 per cent in the year through the first quarter.

Twenty per cent of sales are financed in China, compared with about 90 per cent in the West.

Some analysts say banks began limiting their auto loans as early as March. They foresaw growth slowing further for such financing over the rest of the year.

"Many of these banks are prepared for listings, and they cannot let their loan portfolios deteriorate," said ING analyst Peter So.

"The growth rate will slow further as the banks become more careful."

But he said it was too early to write off the rest of the year. Other analysts expect 20-30 per cent higher sales this year compared with 2003.

Slower Production

In a sign the economy may be coming in for a gentle landing rather than a crash, industrial output rose a weaker-than-expected 17.5 per cent in the year through May, the slowest annual pace in seven months.

Last week, official statistics from CAAM indicated China produced 30.5 per cent more cars in May than a year earlier.

An economic slowdown may be emerging as automakers spend US$13 billion to triple capacity in China to some 6 million units by the end of the decade.

(Business Weekly June 23, 2004)