Bubble about to explode?

Automologist, LILY, examines the economy of China and Greece, and how their car industries are affected.

“China stock market is more frightening than Greece and even the US in 2007,” said Bill Ackman. I was aware that China’s stock market has been sliding, but I did not realise the situation was so dire until I read Ackman’s, the billionaire hedge fund manager, statement.

The overall economy of China is a concern. Economic statistics is unreliable due to lack of transparency, the shadow banking system and high leveraged stock investments.

The recent “hot” economic news has been about Greece trying to escape bankruptcy. A report by the Association of Motor Vehicle Importers Representative revealed that new passenger car sales dropped in June by 21.6% YOY, while in the month of May there was a 15.7% YOY increase. Overall, the Greek economy had a meagre 0.2% growth compared to the same period in 2014.

Modern economics is more complicated; there are always isolated cases which are anomalies. That is why we use “ceterus parabus” in Economics 101. “Ceterus parabus” becomes more important, now more than ever, as there are more variables in the current economy.

Back to China. Double digit growth in the economy or car sales has become history. In the first quarter, economic growth was merely 7%, the slowest rate in decades. Price cuts and incentives are now common in the Chinese car market, but demand remains tepid. The China Association of Automobile Manufacturer (CAAM) set the inventory warning level at 45 days; the average for any car company is usually 24 to 36 days. In May, the inventory of passenger cars reached 50 days! In the first half of 2015, GM’s sales was down by 10.5% YOY while last year recorded a 4.4% sales increase in the same period. Even though there is still growth, we need to determine whether the “health” indicator is green or red.

China Passenger Car Association said that “the stock market turmoil has led people putting off their plan to buy new cars.” There are many other reasons which contribute to the sliding sales of new passenger cars in China, directly and indirectly. Some of the reasons are the removal of the preferential tax policy by the government, the implementation of quotas for number plates in the cities, increased fuel prices and even short-term factors, such as the festive season.

Mary Erdoes, CEO of JP Morgan Asset Management, said about China, “It’s been 25 years of 7% growth. No other country has displayed that. Not even the US. There’s a lot going on in the economy and it’s completely dissociated with the stock market.”

But I am still left with the question of “where is China heading to?”

image: zerohedge.com