Double-hit leads to escalating market adjustment

As the larger cities began to implement restrictions on car purchases, consumers grew increasingly concerned that other cities would follow suit.

These fears triggered a buying frenzy in China's major cities, which, in turn, created a payback effect and a high base, which we feel are key factors behind the current decline in sales.

Taking Nanjing, the capital city of eastern Jiangsu province, as an example, registrations of passenger vehicles in the first five months of last year surged by 60 percent year on year, to then slump by 16 percent year on year in the same period of 2015.

Not to be overlooked is the volatile stock market, which, in our opinion, has caused consumers to postpone car purchases to a considerable extent, particularly in the country's main urban areas. Looking ahead, we expect to see dealerships make tangible strides in their efforts to shift built-up stocks during the third quarter and the fourth quarter in the wake of the production volume adjustments that automakers will inevitably make this summer.

In the months to come, these corrections will lead to significantly lower production levels in comparison to the level of wholesales.

Furthermore, once actual demand levels out in China's largest cities, we expect the payback effect to dissipate gradually throughout the second half of the year, while previously postponed purchases are likely to be revived by next year's Spring Festival at the latest.

In short, the outlook for the third quarter 2015 is a fairly pessimistic one given the double-hit from both high inventory levels and the deceleration in actual demand.

That being said, we have good reason to be relatively optimistic for China's passenger vehicle sales in the final quarter of 2015 and in the year to come.

In light of the assumptions outlined above, our forecast for passenger vehicle sales in 2015 has been revised down by around 400,000 units.

Nevertheless, we envisage a brighter future as we project an upswing in the annual sales growth of passenger vehicles to 8.9 percent in 2016 from a rate of 6.7 percent this year.

The author is China forecasting manager at LMC Automotive. Contact the writer at bzhu@lmc-auto.com.