China auto Apr13.pngSomething very strange happened in China’s auto market during Q1. As the chart shows, sales (red square) rocketed 20% in January/February versus 2012 (green line), before cooling to 15% growth in March. Neither government nor the auto industry expects this pace to continue:

Government forecasts are for 8% overall growth this year
Industry forecasts similar growth of 10% in passenger car sales

Q1’s strong start means overall 2013 growth is already at 5%, even if the rest of the year stayed at 2012 levels. So clearly Q1 performance is unlikely to be repeated. Its story is, however, well worth recording as it provides a fascinating insight into the policy transition underway:

• Major cities now auction very limited quantities of car licence plates each month (eg just 11k in Shanghai). Effectively, therefore, a licence plate can now be worth more than the car itself
• So it seems a new market has temporarily developed where poorer people sell old cars to wealthy people – who then scrap them and use the number plate on a new luxury car
• In turn, of course, this means the used car owner also has to buy a new car – and thus March sales of low-cost usually Chinese-made entry vehicles jumped to 688k
• But underlying demand has clearly been weakening, as government restrictions have tightened. Thus inventories rose during February from 1.1 to 2.01 months – causing panicked dealers to make one-off ‘bargain offers‘ in March to bring stocks back to normal levels

The bizarre result was that whilst average Shanghai auction plate prices in March reached Rmb 90k ($14.5k), almost 50% of new car sales were low-priced domestic models.

Today’s trading game amongst the rich of buying new licence plates and luxury cars as ‘investments’ is likely to be one of the first casualties of the new regime. But in the meantime, its clearly been very good news for poorer people with an older vehicle to sell.