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China’s Auto Sales Slump: Tip of the Iceberg?

Asian stocks were down today—the battered Shanghai Composite index down more than 1 percent—on news that the July reading of a private purchasing manager index showed China’s manufacturing sector in contraction. The private Caixin China figure was below analyst expectations—and well below an official PMI reading released earlier in the weekend that showed manufacturing levels merely stalling.

Underlining the statistics are reports that car manufacturers are seeing signs of real weakness in the Chinese market. Bloomberg:

When China’s economy was booming, motorists became a symbol of the nation’s new spending power. Now, falling car sales may be more a symbol of China’s steady deceleration.

Voracious demand saw China overtake the U.S. as the world’s biggest car market in 2009, spurring auto giants including Ford Motor Co. and Volkswagen AG to supercharge their production in the country. By contrast, Ford now sees a potential decline in auto sales in China for the first time in 17 years. Volkswagen suffered its first sales drop in a decade during the first half of the year.

Car sales are an important indicator of the health of any modern industrial economy, as cars are the most important consumer purchases, other than real estate, that most families regularly make. They are important both as an indicator of economic activity (because cars account for so much raw material consumption), and as an indicator of consumer sentiment (because people buy new cars mostly when they are feeling good about their prospects). In a system like China’s, in which official government statistics are systemically distorted and unreliable, car sales matter even more. This is not good news.

Given that global prices for the raw materials that go into car production in China will likely rise or fall along with Chinese car sales, this market signal tells us something about global prospects as well as about the Chinese economy. It will take more than stock market bailouts to turn all this around. The world’s attention is going to be fixed on China’s wobbles until we see where this is going to go.

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