China’s Car Sales Fall, Compounding Slowdown Fears

China is the world’s largest automotive market. Therefore, any negative sentiment in China’s car sales echoes around the globe. Last year was the first time in more than two decades that China’s car sales fell YoY (year-over-year). This year hasn’t been any different. Auto sales have now contracted for 13 consecutive months.

According to the China Association of Automobile Manufacturers, China’s vehicle sales in July fell 4.3% YoY and 12.1% month-over-month. This decline followed 16.4% and 9.6% declines in May and June, respectively. In this year’s first seven months, China’s car sales fell 11.4% YoY to 14.132 million units.

Trade war, weak domestic demand weighing on China’s auto demand

Several factors are weighing on China’s auto demand. These factors include slowing economic growth, weakening domestic demand, and ongoing trade tensions. US auto demand was also slowing. As a result, automakers made large bets on China to maintain their revenue and earnings. However, weakening demand and tariff wars have made it difficult for them to operate profitably in China.

The trade war and Tesla

Tesla (TSLA) is mulling a price increase in China due to uncertainty in its currency. After Donald Trump announced on August 1 that the US would be imposing 10% tariffs on $300 billion in Chinese goods, trade tensions rose. China retaliated by devaluing the yuan.

Automakers that manufacture cars outside China and ship them to the country could be hit especially hard by this move. Tesla imports all of the vehicles it sells in China. BMW and Daimler also import vehicles from abroad.

US automakers get a double whammy

While China has been trying to spur car sales through a slew of measures, automakers’ fortunes haven’t changed noticeably. US automakers Ford (F) and General Motors (GM) are battling sagging car sales in Chinese and US markets.

China’s new energy vehicles sales drop for the first time in two years

Perhaps even more concerning is that NEV (new-energy vehicle) sales, among the rare bright spots in China’s auto demand, fell in July. NEV sales fell for the first time in two years, by 4.7% YoY. Last year, they grew 62% YoY. The most likely reason for the sales drop is policy adjustment—China stopped offering subsidies for NEVs in July.

China’s domestic electric vehicle market and its Tesla equivalent, NIO (NIO), were impacted heavily by the shift in policies. After rising 36% in July, NIO stock has fallen 12% this month.

Weakening economy

China’s falling car sales are just one of the many signals the economy is weakening. China’s manufacturing PMI fell again in July due to ongoing US-China trade tensions and sluggish domestic demand. Its producer price index fell 0.3% YoY last month after approaching zero in June. Lower inflation is fueling deflation concerns. China’s July trade data, released on August 8, also showed a contraction in imports. China’s imports have fallen YoY in six of seven months this year. JPMorgan Chase and Goldman Sachs have also raised the alarm about Chinese stocks’ outlook. The banks have cited rising trade tensions, lower potential for stocks’ valuation to rise, and bearish cash flow.

This year, the iShares MSCI China ETF (MCHI) has returned 2.7%, while the S&P 500 (SPY) has risen 15.3%. The iShares China Large-Cap ETF (FXI) has fallen 2.1%.