Since April this year, China's retail sales of automobiles have rebounded rapidly, and the year-over-year growth rate has been higher than the overall growth rate of social consumption, and this situation continues.

In October, retail sales of automobiles grew at a year-on-year rate of 12 percent, compared to 4.3 percent for social consumption.

Compared to other major economies, China's auto sales recovery is also among the best. According to Bloomberg statistics, China's auto sales fell 4.7% from January to October, much less than the 17% decline in the US, and the 14.7% decline in Japan.

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Why the high growth?

According to Zhang Chen and Liang Zhonghua of Zhongtai Securities, this year's macroeconomic backdrop is unique because of two factors: Covid-19 and easing policies.

They said in a report on November 29 that the change in travel patterns caused by Covid-19 may have some support for auto sales. Although Covid-19 was first prevented and controlled in China, residents still have a certain degree of scruples about Covid-19, as evidenced by the persistently low food and beverage consumption.

When society returns to normal, residents are more willing to travel by car than by public transportation, which is relatively safe.

According to Zhongtai Securities, road congestion is recovering quickly across the region, but metro travel is generally slow to recover. For example, road congestion in first-tier cities has been on the rise since May, while subway ridership is currently only around 90 percent.

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China's easing policy has also played an important role in boosting auto consumption. According to these analysts, monetary easing tends to boost auto consumption, and historical data shows that M2 money growth is about three months ahead of auto retail sales growth.

They argue that the flow of abundant money is usually uneven, and tends to flow first to higher-income groups with greater leverage. As a result, we will also see that luxury car sales have grown faster than passenger car sales this year, remaining above 25% since May, much faster than passenger car sales.

In addition to Covid-19 and monetary easing, Zhongtai Securities sees the rise of new energy vehicles including NIO, Li Auto, and XPeng as supportive of auto sales.

In 2019, NIOs accounted for about 5 percent of passenger vehicle sales, and this year the proportion has been rising, reaching 6.7 percent in October.

Zhongtai Securities reports that if you simply exclude luxury vehicles from passenger car sales, the growth rate of passenger car sales in October dropped from 8 percent to 6 percent, and if you further exclude new energy vehicles as well, the growth rate of passenger car sales drops to 1.7 percent.

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How long can high growth last?

It is worth noting that the above factors will still support auto consumption in the short term, but with the gradual fading of the effects of Covid-19 and the return of normalization of monetary policy, these factors may weaken somewhat.

At the same time, policies to stimulate auto consumption have also been implemented. Under the influence of many factors, will the auto industry continue to rebound?

According to Zhongtai Securities, the auto industry does not account for a large percentage of China's national economy, and the value-added by auto parts and components only accounts for about 2% of the total value-added, which may have a limited driving effect on the economy as a whole.

Since the auto industry has a limited driving effect on the overall economy, a sustained increase in auto consumption will more likely reflect the expansion of overall demand.

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A review of historical data reveals that auto consumption is actually pro-cyclical. The growth rate of retail auto sales is highly correlated not only with the growth rate of electricity generation but also with the growth rate of residential loans.

Only when the economic cycle as a whole goes up, residents' willingness to leverage increases and demand as a whole continues to expand, auto consumption will see a sustained recovery.

Therefore, Zhongtai Securities believes that the stimulus policy for auto consumption is more of a "gilding the lily" effect.

According to these analysts, China's auto consumption will continue to grow at a high rate in the short term, but the rebound may not be sustainable if we assume that the economic recovery ends and the economy converges to a medium- to long-term growth trend.

Expected factors may come from the implementation of income distribution reform measures and the improvement of the income level of low- and middle-income groups, they said.

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