After nearly three decades of uninterrupted growth, the world has become accustomed to China serving as one of its major engines for growth. However, the economy stumbled in 2009 when real growth was the slowest since 2002 and GDP expanded by its lowest level this century in 2012. Furthermore, according to a recent study by the US Federal Reserve, China’s trend rate of growth could slow gradually to around 6.5% by 2030. However, sales of light vehicles enjoyed double-digit growth between 2001 and 2010 - except in 2008 – and still continue to climb and so this weaker economic growth outlook does not necessarily point to a contraction in demand, especially as China’s plan for a transition from an investment and export-led economy to one that is driven by consumer demand will gain more traction during the current decade.
Passenger Vehicle Sales and GDP Growth 1998-2012
Source: JATO, Euromonitor International
Beijing has made some progress in building a welfare state which will allow an increase in consumption over time. The government has also – cautiously – begun to introduce deregulation of interest rates. The move is timid but eventually should raise the cost of investment, thus tipping the balance in favour of consumption. The cause of this rebalancing is the decline of the share of working-age people in the population, which has been dropping since 2011 as the government's policy on limiting the number of children per couple decreased the number of people entering the labour force. As growth of the labour force slows, employers will have to compete for workers and wages will continue to rise. Already, real wages are increasing by about 10% per year and this rise in household incomes has ultimately had a far greater positive impact on vehicle demand than economic growth.
Comparing the volume of passenger vehicle sales in China against households by income reveals that demand has essentially grown in line with the development of homes with an annual disposable income (ADI) over US$10,000. In the context of an economic growth forecast of 8.2% and the number of Chinese households with an annual disposable income over US$10,000 projected to climb 11% to 156 million, demand is certainly not expected to cool in 2013. In fact, the CAAM (China Association of Automobile Manufacturers) reports that total vehicle sales increased by 12.6% in the first five months of 2013 and so passenger vehicle sales should easily rise to exceed 18 million units in 2013. Looking further ahead, our current forecast for households by income suggests that demand will exceed 30 million units in 2020, barring any major economic or natural disasters.
Passenger Vehicle Sales and Households by Annual Disposable Income 1998-2020
Source: Euromonitor International, JATO