Another boom in car sales is beginning in China, spurred by rising incomes in third-tier cities, and could continue for a few years, JP Morgan said on Wednesday.
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A 21% surge in car sales this year has caught Chinese car makers, which had curbed production on expectations the country’s sharp economic slowdown late last year would depress demand for big-ticket items, off guard, according to Reuters.
JP Morgan managing director and China economist Frank Gong attributed the boom to a surge in the number of people in third-tier cities like Xian and Chengdu who now earn over US$5,000-$6,000, the minimum needed to buy and maintain a car.
“The strongest growth in car sales now is in third-tier cities and low-end cars,” Gong told a press briefing in Hong Kong. “We believe this is the start of a third auto boom in China.”
Car sales have also been helped by the Beijing central government’s economic stimulus measures which included halving purchase tax on small vehicles to 5% from January and incentives for rural residents to replace old vehicles.
Car ownership is just 2.9% of the population – one of the lowest rates in the world – according to Credit Suisse, which expects ownership to surge fivefold in the next decade to reach 148 cars per 1,000 residents by 2020.
The rebound in car sales, which has accelerated in the past few months with sales surging 47% in May from a year earlier, is prompting car makers in China to ramp up production again as they also put in place long-term expansion plans, Reuters said.
Credit Suisse estimated that 40% of urban households in China can afford a medium-priced car if auto financing is available while 90% of rural households can afford the cheapest cars on the market.
It forecast 20% growth in car sales throughout 2009 and 15% growth next year. As strong car sales are key to buoying the domestic economy, the investment bank expects the government would introduce more stimulus measures to boost demand if sales slow.
