Car sales in China slid 19.4% in May from April, the second straight monthly decline, as government efforts to slow a racing economy and restrict easy car loans kept potential buyers away.

Reuters said investors and economists have been watching the fast-growing motor industry for signs that Beijing’s recent steps to cool overheating sectors of the economy were taking effect but, for market leaders such as Volkswagen and General Motors, the slide is a worrying sign that a production boom is outpacing demand.

A total of 177,500 cars were sold last month, down from 220,100 in April, the China Association of Automobile Manufacturers reportedly said on Tuesday – sales in April had already slipped 2.7% from March.

“The main reason (for the fall) is because there’s been a tightening of credit, of auto loans,” Christopher Lee, of Standard & Poor’s Asian Equity Research, told Reuters, adding: “Most consumers are taking a wait-and-see attitude toward buying cars.”

Speculation of a 20% dive in May sales drove Hong Kong-listed automotive stocks such as Denway Motors and Brilliance China Automotive sharply lower last week – Brilliance was down 5% on Tuesday afternoon and Denway was down 3%, underperforming the market’s slight fall, the report noted.

Reuters said sales were still up 21% compared with May 2003 but growth is trending lower following a 38.2% rise in April from a year ago, and a 76.8% rise in February.

The news agency noted that car sales tend to slow in May because of the week-long Labour Day break, but the fall was bigger than in previous years – in 2003, May sales slipped 6% from April, a smaller fall partly because Chinese bought cars to get away from public transport during last year’s SARS outbreak.

May 2004 sales also fell short of the 215,100 cars produced in the same month by 37,600 cars – nearly double April’s shortfall – indicating inventories piled up, Reuters added.

The State Statistical Bureau reportedly said on Monday that manufacturers and distributors had about 103,000 unsold cars at the end of April, equivalent to about 16 days’ output.

That bodes ill for foreign car makers, which are spending $US13 billion to triple annual capacity to some six million units by the end of the decade, Reuters said, adding that analysts have warned of a glut and price war.

“Judging from what we know now, the next couple of months sales are probably going to be down,” analyst Lee told Reuters, adding: “If I took a 12-month view, I think maybe you’d see car sales picking up at the end of the year.”

That could mean sales in 2004 growing 20% from 2003, he reportedly said, well below the 80% and 50% growth seen in the past two years, respectively.

Just over two million cars were sold in China last year as a decade of strong economic growth put cash in the pockets of Chinese starved of consumables, the report noted, adding that, in the first five months of 2004, 964,700 cars were sold, up 37.7% from the same period of 2003.

The news agency said the Beijing government is now restricting the amount of vehicle loans that commercial banks can offer, part of measures to douse an economy that grew 9.8% in the year through the first quarter.

Some 20% of sales are financed in China, compared to about 90% in the West, Reuters noted.

In a sign the economy may be coming in for a gentle landing rather than a crash, industrial output rose a weaker-than-expected 17.5% in the year to the end of May, the slowest annual pace in seven months, the report said.