Sino-American trade war slows down Chinese economy; auto sales on a steady downward trend

Chinese economy has registered its slowest growth since 1992 last quarter at 6.2%, down 0.2 percentage point from March quarter. The negative data is indicating the impacts of the prolonged Sino-American trade war. Though U.S. President Donald Trump and Chinese counterpart Xi Jinping agreed in June to reopen trade talks, the fourth round of talks between the two countries have been delayed.

China’s total exports have registered a drop in the first half of the year. Despite government’s steps like slashing taxes and reducing social security contributions, the impact has not been significant.

Auto sales, another key component of consumer spending and revenue source for the country, have been sluggish in the first half of 2019. Sales of new vehicles declined 12% on the year in the H1 and have been on a steady downward curve for last 12 months through June. The trend is not likely to improve in H2 2019.

However, economic growth still came within the government's target range of 6% to 6.5% last quarter. While China has introduced elements of a market economy, it remains an essentially socialist nation controlled by the Communist Party, in which, the government policies are designed to help the country meet numerical targets.

China’s auto industry accounts for about 10% of gross domestic product and a key employment generator. So a continuous drop in new car sales will have a major impact on the economy.

Though EV sales were on a rise in Q1 2019 reaching nearly 300,000 units, in April, sales of EVs and plug-in hybrids rose only 18 per cent to about 97,000. In May, demand edged up only 1.8 per cent YoY to around 104,000 units. On March 26, 2019 the Chinese government slashed subsidies for EVs and plug-in hybrids by 50 per cent leading to a quick drop in the sales. The EV market in China is not likely to bounce back soon considering the slowing economy and the government’s plan to phase out the subsidy program completely by the end of 2020.

The auto industry contributes to the Chinese consumption of metal, especially for steel and aluminium. A drop in metal demand in China would continue to drag down international commodity prices. China's sway over global markets means that close attention must be paid to its own economic conditions and a slowing economy in China indicates an equally slower market in the rest of the world. The trade conflict can do more harm to China's economy unless the negotiations end with a beneficial deal for both the economies.