In November, China’s Light Vehicle (LV) market performed at a level that exceeded our previous expectations, with sales of locally‐made models totalling 2.0 mn units, up by 3.4% on last year. More striking still was that the SAAR climbed to 24.2 mn units in the month, setting an all‐time high for the second month in a row.

The Light Commercial Vehicle (LCV) sector made a positive contribution in the month, with the year‐on‐year (YoY) sales decline narrowing to 10% from the lowest drop of 17% seen in October. The LCV SAAR rose to 4.7 mn units, an increase of 0.4 mn units from a month earlier. Although the SAAR was still below the average of 5 mn units achieved in the first eight months of 2014, we believe that the bleakest period ever experienced by the LCV sector – a consequence of the forthcoming nationwide implementation of the strict China IV emissions standards – is coming to an end.

The performance of the Passenger Vehicle market in November also looked robust; the SAAR stood at 19.5 mn units, a level similar to that seen in October, but a significant leap forward from the 18.4 mn units averaged in Q3 2014. The YoY sales growth of locally‐made PVs reached 7.5%, albeit compared to an unusually high base in the same month last year.

We have long held the view that the PV market would remain on a downswing in Q4 2014; all the signs have been in evidence since the start of the year. Our assessment came about as a result of the slowdown in growth in China’s tier 1‐2 cities, triggered by the payback effect from early purchases prompted by public unease over the increasingly prevalent restrictions on car purchases across China. Our concern was exacerbated further by the downward trend in China’s overall economic growth. Recent data indicate that the economy has continued to decelerate in Q4 2014, with industrial production, fixed asset investment and exports all weakening. The industrial sector continues to struggle due to excess capacity and the sharp slowdown in the property sector.

In contrast, YoY growth in sales of locally‐made PVs reached 8.7% in October and November collectively, above the 8.4% seen in Q3 2014. This growth begs the question: what has been driving the higher‐than‐expected sales so far in the quarter?

The most recent development in the dealer‐level inventory only served to reinforce our concerns. CADA’s dealer‐level index was reported at 1.83 months in November, a clear deterioration from the 1.42 months seen at the end of Q3 2014, and particularly when compared to the index level of 1.33 months in November 2012 and 1.38 months in November 2013.

The difficulties experienced by auto dealers have been prevalent in the media of late. Just days ago, four dealers in Shanghai purported that they would quit Beijing Hyundai’s distribution network, while BMW’s dealers united to ask for compensation amounting to CNY6 billion from the OEM, suggesting that dealers are holding unmanageably high stocks and are unable to meet the current high sales targets set by the OEMs.Going forward, auto dealers may have little choice but to accept higher inventory levels as the year draws to an end, given that a number of carmakers still have a long way to go to meet their annual sales targets. This marked increase in stock inventory at a dealer level has triggered an upward revision of our full‐year 2014 forecast, which, in turn, will be yet another negative influence on wholesale growth in the year to come.

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