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Auto market slump reaches China; car makers seek bail-out news
21 November 2008

The perils of economic liberalisation are now playing out in communist China where the country's big auto companies are getting into the Detroit Big Three act, though in a muted way. 

The Chinese car market, which grew at 24 per cent or thereabouts annually from 2001 to 2007, slowed down by a few percentage points in September this year and is expected to slow down further as the economy slows. Many Chinese car companies have reported flat or even negative sales in the second quarter of 2008-09.

And, just like US car companies, which have received $25 billion in loans first to increase green research and has now sought an additional $25 billion in loans to cope with a recessionary economy, Chinese car manufacturers too want help from their government due to slumping sales.

Although car sales in China fell in September by a couple of percentage points to 750,000 a month, car makers increased deliveries of new cars to dealerships by 10 per cent to keep factories busy and to avoid lay offs. Retail sales figures for October are expected to fall further, which could force these companies to further cut prices as they have been doing for some time.

Although the slowdown in China is not as worrisome as in the West, its problems have largely been imported. China's growth has been fuelled by exports of all kinds of goods to Western countries, many of which are now either heading towards or are already in recession. The top three export markets for fully assembled vehicles are Russia, Ukraine and Vietnam, all of which are grappling with the global financial crisis.

In China, real estate prices have fallen along with the stock market in the past year leading to tightened liquidity amongst consumers. Along with this, the Chinese government has not reduced fuel prices despite the recent decline in world oil prices.

Fuel prices in China are subject to tight government control. Beijing for many years subsidised diesel to keep it below market rates in order to stimulate demand for oil artificially, which incidentally contributed to crude prices shooting up globally earlier this year. China finally raised oil prices slightly in summer, though it hasn't yet decided to let fuel prices float freely on the market. The government is now said to be trying to encourage energy conservation and also wants oil refiners to recover financially from being forced to sell gasoline and diesel below cost earlier this year during the spike in oil prices.

Chinese car makers, however, differ on the kind of help they want. Instead of a direct infusion of cash, some companies are looking for more government grants to help them develop hybrid gasoline-electric cars and other cutting-edge technologies for which they may have to cut research spending if sales continue to fall.

Others want more lenient emission standards and better protection from increasing competition.

Some car makers say that the Chinese industry wants the government to help consumers start buying cars again. This could be through lower car taxes and fuel prices.

While sales have fallen by a couple of percentage points its from a high of 24 per cent, it still means that the industry is growing in double digits, a far cry from Western nations where growth is headed towards negative figures.

China is now the second largest car manufacturer in the world and is targeted to sell 10 million vehicles this year against an estimated 14 million vehicles in the US.

Chinese companies also have not had to resort to layoffs as domestic sales are strong enough to maintain employment.

In recent times, Western automakers have entered the country in droves tying up with local companies and setting up operations. Chinese carmakers say this is hurting local players and should be stopped by the government.

State-owned Chinese banks have already said they would be more willing to lend money to Chinese automakers as regulators have eased restrictions on loans to heavy industry.

Beijing though has not promised any support.

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Auto market slump reaches China; car makers seek bail-out