China is the world’s biggest car market. But new car sales have fallen for eight straight months… and that has a lot of investors worried.
You see, falling car sales have often been accompanied by recessions in the U.S., the world’s second-largest car market.
That’s because in the U.S., people usually buy cars through bank loans or leasing – both of which are sensitive to interest rates. And when interest rates are rising, the economy is usually slowing down. As interest rates rise, it becomes more expensive to buy cars on credit, so car sales slow.
The “dealer doldrums indicator” plots the year-to-year change in new vehicle sales over a rolling 12-month period.
Over the past 50 years, it’s proven to be a lagging indicator of the U.S. economy. (That means it changes when the economy has already begun to follow a particular pattern or trend. Lagging indicators, while not useful in predicting, help confirm the strength of a trend.)
Since 1970, the U.S. has had seven recessions. During four of those recessions, the “dealer doldrums indicator” showed U.S. new vehicle sales falling by more than 2 percent. And twice, new vehicle sales fell more than 2 percent months before a recession began.
So it tells us that when new vehicle sales are declining by more than 2 percent, the economy is doing very poorly – or will soon. For instance, the last time the indicator fell below 2 percent growth was in June 2006, about 18 months before the global economic crisis.
In an unprecedented move, Washington fast-tracked a radical new technology bill to ensure that a new technology breakthrough breaks through…
It’s the closest thing I’ve ever seen to government-approved 8,000% growth!
Could the same be true for China?
In China, new vehicle sales last year fell for the first time in 20 years. The decline was sharp – down 3.2 percent year-on-year to 28 million units.
The 12-month declines worsened in 2019. By January, sales were down 5.6 percent, and in February, sales were down by 5.7 percent.
Does this mean that China is close to entering a recession (or already in one)?
Despite what the evidence in the U.S. has shown… the short answer is no.
Big cities turn away demand
At 28 million new vehicles sold in 2018, China’s auto market is 63 percent bigger than the U.S. (which sold 17.2 million vehicles in 2018).
But China’s automobile market is nowhere near as developed as the U.S. As big as it is today, with 170 million private cars on the road, there are still just 123 cars per 1,000 people in China.
That compares with 206 in Thailand, 519 in the U.K. and 800 in the U.S. So there’s immense room for growth in China.
But China’s biggest cities (i.e., Beijing, Shanghai and Shenzhen) have been depressing demand to limit pollution and reduce traffic. Strict quotas are imposed on the number of new car registrations for fossil fuel-powered vehicles.
To make it more difficult to buy a new car, new license plates are auctioned off to the highest bidder, adding to the cost of owning a vehicle.
Beijing, a mega-city of 21.5 million people, is only issuing 150,000 new license plates a year. That’s like telling the 305 million Americans they can only buy 2.1 million new cars each year.
In the technology hub of Shenzhen (the Silicon Valley of China) where 12.5 million people live, the quota is even smaller – just 80,000 new standard (gasoline-powered) cars each year.
If they didn’t have these quotas, China’s car sales would be much stronger than they are today. At auctions, each new license plate often get tens of thousands of applicants. Shanghai, for example, has a bi-monthly auction of 6,460 new car license plates that gets close to 3 million applicants.
In other words, demand for cars in China’s major cities is being artificially held back.
Something unusual is happening in Asia…
And it could make some people very rich.
The rise of the used-car dealer
Restrictions on new cars in major cities is bad for new car dealers, but great for the second-hand car market.
Data from the China Automobile Dealers Association shows second-hand car sales in China amounted to 13.9 million units last year. That’s up from only 3.7 million in 2010 – a compound annual growth rate of 18 percent.
China’s second-hand car market is just starting to mature.
The U.S. market for second-hand cars is 42.7 million units a year – equivalent to 150 percent of the country’s annual new car sales. In China, the ratio is just 59 percent.
So falling new vehicle sales this year shouldn’t be seen as a sign that China’s economy is headed for a recession. Instead, it’s a sign that its car industry is just undergoing a transformation.
It’s also telling us there’s a huge opportunity in China’s growing second-hand car market. That includes everything from auto repair shops, maintenance, spare parts and tires.
These are the kinds of opportunities that we look for in Strategic Wealth Confidential, our monthly service designed to seek out the most profitable investment ideas in Asia.
And right now, there’s one market in Asia that’s being overlooked by most investors.
It’s starting to reshape the entire Asian region… and it will affect the lives of billions of people.
I’ve never seen anything like it in my 24 years of investing, and will likely never see anything like it again. You can learn more here.
Editor, Stansberry Pacific Research