SinoInsight 1
On Oct. 10, several mainland media outlets reported on an internal document by Ping An Bank regarding risk investigations into some listed Chinese vehicle companies. The document noted that Liebao Motor, Zotye Auto, Hawtai Motor, and Lifan Auto will begin bankruptcy proceedings at the end of this year and estimated that upstream and downstream auto parts suppliers could see bad debts totaling 50 billion yuan. The document called on Ping An Bank’s business team to do a risk investigation of existing bank customers who are involved in the supply chain of the four aforementioned auto companies.
According to data released by the China Passenger Car Association, general passenger vehicle retail sales volume for the month of September this year decreased 6.6 percent year-on-year. Also, from the start of the Sino-U.S. trade war in June 2018 to September 2019, general passenger vehicle retail sales volume year-on-year growth fell in 15 of the 16 months, with May 2019 seeing the sharpest decline (down 23.6 percent).
OUR TAKE
1. Auto sales are an important indicator of social consumption, and the consecutive months of falling auto sales year-on-year growth indicate that China’s consumption power is shrinking.
Falling auto sales and rising consumption of instant noodles in China are obvious signs of a rapidly deteriorating Chinese economy.
2. The four car companies mentioned in Ping An Bank’s internal document are low-end car brands that sell automobiles at around 100,000 yuan or less to mostly working-class consumers. The sluggishness of the low-end auto industry is an indicator of the impact of the Sino-U.S. trade war on the Chinese economy; it is very likely that Chinese enterprises are either forced to shutter or move production overseas as they struggle to cope with smaller margins due to U.S. tariffs, resulting in rising unemployment on the mainland and diminishing consumption power. And when money is tight, consumers tend to first give up luxuries like cars.
We believe that the PRC government will find it very difficult to reverse the impact of the Sino-U.S. trade war on China’s real economy even after a trade agreement is reached.
3. China’s sluggish will have a ripple effect on the financial industry. The collapse of auto companies means more bad loans (China has an over 1 trillion yuan automotive finance market), and bad loans affect China’s banks. The PRC’s finances and financial system will come under strain when it needs to rescue the banks.
