Sales of locally‐made passenger vehicles in the month fell by 1.4% on last year, bringing YoY growth down to 2.8% in Q2 and to 7.2% for H1 as a whole.

CADA’s dealer‐level inventory index stood at 1.68 months at the end of June, virtually unchanged from 1.70 months in May and 1.67 months in April. According to LMCA, typically, wholesales strengthen at the end of each quarter, but the current high inventory levels at dealerships are undermining any potential momentum, hence the decline in passenger vehicle sales in June.

LMCA found that in the first five months of 2015, passenger vehicle registrations in Tier 1 and 2 cities declined by 4% on 2014, versus the 21% YoY growth seen during the same timeframe last year. In contrast, the comparison in tier 3, 4 and 5 cities was decidedly consistent, with YoY growth of 14% achieved in both years.

Given that Tier 1 and 2 cities were responsible for almost half of the market growth in the first five months of last year, the recent slowdown in sales in the overall market is a natural consequence of the growth decline in registrations so far in 2015. LMCA believes that delving a little deeper into recent developments in China’s largest cities will help to unravel the reasons behind these disparities.

As the larger cities began to implement restrictions on car purchases, consumers grew increasingly concerned that other cities would follow suit. These fears triggered a buying frenzy in China’s major cities, which, in turn, created a payback effect and a high base, which we feel are key factors behind the current decline in sales. Taking Nanjing, the capital city of Eastern Jiangsu province, as an example, LMCA explains that registrations of passenger vehicles in the first five months of last year surged by 60% YoY, to then slump by 16% YoY in the same period of 2015.

LMCA cites the volatile stock market as another major incentive for consumers to postpone car purchases to a considerable extent, particularly in the country’s main urban areas.

Looking ahead, LMCA expects to see dealerships make tangible strides in their efforts to shift built‐up stocks during Q3 and Q4 in the wake of the production volume adjustments that automakers will inevitably make this summer. In the months to come, these corrections will lead to significantly lower production levels in comparison to the level of wholesales. Furthermore, once actual demand levels out in China’s largest cities, the company expects the payback effect to dissipate gradually throughout the second half of the year, while previously postponed purchases are likely to be revived by next year’s Spring Festival at the latest.

LMCA believes the outlook for Q3 2015 is a fairly pessimistic one given the double‐hit from both high inventory levels and the deceleration in actual demand. That being said, the company is relatively optimistic for China’s Passenger Vehicle sales in the final quarter of 2015 and in the year to come.

In light of the assumptions outlined above, LMCA’s  forecast for passenger vehicle sales in 2015 has been revised down by around 400,000 units.