China auto Sept11.pngChina’s auto market growth has clearly stalled.

As the chart above shows, August figures (red square) continued the trend of recent months, and were only 5% above 2010 levels (brown line). Rao Da, head of China’s automotive association, also repeated his warning that “there is no sign of a market recovery“.

The reason is not hard to find. Although August data suggests inflation may be peaking, its level of 6.2% is far too high for comfort. And food price inflation of 13.4% is a major problem for a relatively poor country such as China.

Many in the West simply do not realise that the official definition of ‘middle income’ means people who earn just $2/day – $20/day. The rich are those earning over $20/day, and are just 4% of China’s population.

And even these figures overstate people’s real earnings. The Asian Development Bank chooses to base them on its own more favourable version of the purchasing power parity (PPP) metric, not the amount actually earned in a pay packet.

What happens next is becoming a critical issue. The blog’s co-author, John Richardson, notes JD Power’s forecast that China is on track to produce 31 million vehicles in 2013, up from 17 million last year.

China boosted sales 32% in 2009 and 46% in 2010. But this was based on its ‘no questions asked’ lending surge. Now lending growth has stalled, due to the inflation problem. Sales are forecast to be just 19 million this year. Continued 5% growth would mean only 21 million sales in 2013.

So what will happen to all this capacity? And what will happen to all the new chemical and polymer capacity built to supply it? It doesn’t take a rocket scientist to deduce that China has only two options:

• Ramp up its export sales
• Shut down surplus factories

Neither seems a very attractive option, given that the world was counting on China’s continued growth to sustain global demand.

The New York Times notes that “any slowdown in growth is likely to shock the world’s automakers“. The prospect of 45% over-capacity by 2013 means such a shock may not be far away.