The wheels are falling off the China auto growth story as overcapacity, falling prices and the Beijing government’s clampdown on credit as it cools a scorching economy are conspiring to erode profits and share prices at Chinese auto makers, Reuters reported.

The news agency noted that, on Tuesday, Ford’s main Chinese partner, Changan Auto posted a 7.3% fall in second-quarter earnings as car sales skidded and analysts said its full-year profit may only rise 10% – less than a previously predicted 20% – as a price war begins to bite in a decelerating market.

In June, the number of cars sold in China fell for the third month in a row, growing slightly on the year, and state media are speculating that for the first time, sales fell in July on a year-on-year basis, Reuters said.

“The price wars are set to rage for at least the next two to three years. Nobody is going to be immune,” Lin Wenjun, auto analyst at Capital International Holdings in Shanghai, reportedly said.

Many would-be buyers are waiting for prices to fall further, Reuters noted, adding that, in Hong Kong, shares in Brilliance China Automotive Holdings, the Chinese partner of BMW, continued to slide after analysts cut their profit forecasts and ratings on China’s biggest minibus maker.

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Since the start of the year, Brilliance stock has fallen by 60%, while Denway Motors, the joint venture partner of Honda Motor, is off 28%, Great Wall Holdings is down 56% and Qingling Motors is off 35%, the report added.

JP Morgan analyst Frank Li reportedly said higher sales won’t be enough to offset margin contraction in the industry this year.

“The de-rating pressure on China’s auto sector will not fade away in the next 12 months because China’s auto market will face increasing oversupply in the next two years,” he wrote in a note cited by Reuters.

Christopher Lee of S&P Equity Research reportedly said he expects Brilliance, Qingling and Great Wall to report declining earnings this year, with only Denway, which makes popular Honda sedans and minivans, seeing a profit increase.

“Pricing, competition, raw material cost increases this year — margins are definitely going to be hurt,” Lee said, according to Reuters.

JP Morgan reportedly said China’s car sector woes are supply-driven, adding that sedan demand should grow by a solid 25% this year to 2.59 million over last year’s bigger base, but predicting oversupply of 11% this year and 23% in 2005.

Changan on Tuesday said total first-half sales rose 27.5% to 248,810 vehicles, boosting turnover by 39.7% to 10.14 billion yuan, but revenue dropped 30% in the second quarter to 5.38 billion yuan due to a vicious price war, Reuters said.

The report said shares in Brilliance, which jointly makes luxury cars in China with BMW and also sells its home-grown Zhongua sedan, fell 5% on Tuesday after sliding 8.2% on Monday on media reports its chairman and other top executives had submitted resignation letters after selling down their stakes.

Brilliance reportedly said the directors have not resigned. However, five executives have sold shares dating back to 2003.

According to Reuters, JP Morgan and Core Pacific-Yamaichi cut their ratings on Brilliance to “underweight” and “sell”, respectively, and cut earnings forecasts for this year and next.

Wendy Huang of Core Pacific-Yamaichi told the news agency she expects first-half earnings at Brilliance fell by 15%.

Its minibus sales fell 12% to 31,500 units in the first half and its Zhonghua sedans plunged 46% to 8,404, Core Pacific reportedly said. It sold 4,883 BMWs in the same six-month period, representing only 27% of its full-year sales target of 18,000, the brokerage added.

Haitong Securities analyst Gu Qing reportedly expects Shanghai, which owns 20% of GM’s main Shanghai venture, to increase second-quarter net profit by about 5.7% to 690 million yuan ($US83.33 million) – less than its 131% first-quarter surge to 710.67 million yuan.

“But it’s simply by dint of its relationship with GM, whose sales are still doing well, that it will be able to avoid doing any worse,” she told Reuters. “The market is becoming saturated. We are just not going to return to the heady days of growth.”