China: A Mixed Bag Turns Very Ugly

From Testosterone Pit:

Perhaps the People’s Bank of China saw a thing or two beyond publicly known data when it announced a 25-basis point rate cut last week, the first since 2008, because so far, economic data has been a mixed bag of decent numbers. Exports were strong, up 15.3% in May over prior year. Retail sales rose 13.8%, lower than expected, but still. And industrial production grew 9.6%, a healthy clip—but ominously, it included hundreds of thousands of new vehicles that have been overproduced and are now piling up on lots around the country.

And so there are divergent scenarios: automakers under the influence of euphorone are building plants, adding capacity, pumping out units, and stuffing channels with all their might—while dealers, who are forced to take their quotas, are unable to sell about a third of the new production. For them, it will turn into a nightmare as they drown in inventory, the costs of carrying it, and the losses inherent in selling vehicles that have been sitting on the lot too long.

Their only hope is that the government or automakers will introduce incentives to lure people into dealerships. Some are already underway, such as a subsidy for vehicles with engines of less than 1.6 liters. But vehicle sales to consumers would have to skyrocket to meet the phenomenal and still growing production. Unlikely. Next step will be production cuts and layoffs. When that proves insufficient, expansion plans will be trimmed. Another sharp hissing sound from the China bubble.

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