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As China’s massive economy slows, the world’s largest car market is going along with it

China’s car sales rose for the first time in a year last month, but the world’s largest market remains stuck in a deep slump that shows little sign of ending soon as the country’s massive economy slows.

Geely (GELYF), one of China’s biggest car makers, said late Monday that its net profit probably plunged by 40% in the first half of the year. In June alone, the company’s car sales fell 29%.

The slump was caused mostly by a bigger decrease in China sales than it had expected, the company said. Geely’s sales fell 33% in its home market.

Global brands are suffering, too. Ford (F) said last week that it sold nearly 22% fewer vehicles in China during the second quarter than in the same period a year ago. General Motors (GM) posted a 12% drop in vehicle sales in China for the quarter.

Several major Chinese automakers have experienced even steeper falls. Haima Automobile reported a 70% slump in sales for the first five months. Chongqing Changan Automobile, Ford’s Chinese partner, posted a 33% drop during the same period.

Suppliers are feeling the pain. BASF (BASFY), the German chemicals giant, on Monday slashed its profits forecast for the year on Monday, blaming weak car sales and trade tension between the United States and China.

“Globally, production declined by around 6% in the first half of 2019. In China, the world’s largest automotive market, the decrease was more than twice as high, at around 13%,” it said.

Dealers offered big discounts in June to clear inventories of cars that don't meet China's new emission standards.
Dealers offered big discounts in June to clear inventories of cars that don’t meet China’s new emission standards.

Dealers offered big discounts in June to clear inventories of cars that don't meet China's new emission standards.

Dealers offered big discounts in June to clear inventories of cars that don’t meet China’s new emission standards.

China’s car market shrank for the first time in more than two decades in 2018, and the slowdown has worsened this year due to weaker economic growth, the trade war with the United States and tough new emission standards introduced on July 1.

A reluctance by consumers to make big ticket purchases in an uncertain environment is partly to blame, but a government campaign against deadly levels of pollution is also having an impact.

China set July 1 as the deadline for heavily polluted provinces and regions to implement the new emission standards. So far, at least 18 provinces and cities, including Beijing and Shanghai, have done so, and only vehicles meeting them are now permitted for sale.

After falling for 11 months — and by 13% for the first five months of 2019 — car sales rose in June. Cumulative figures for the first half of the year are due to be released on Wednesday.

But the increase in June sales was largely due to heavy discounting to clear inventories of cars with older emission standards — at “significant losses” to dealers and producers — the China Passenger Car Association said in a statement Monday, and it predicted a “lackluster” market ahead.

Analysts from LMC Automotive predict China’s vehicle sales will shrink by 5% this year, worse than last year’s 3% decline.

Shares in Geely — the biggest shareholder in Daimler (DDAIF), the German owner of Mercedes — sank 3.8% on Tuesday to 11.70 Hong Kong dollars, their lowest level in six months.

“Even after the cut in Geely’s sales target, we see downside risk to achieving it,” Morgan Stanley analysts said in a note on Monday, citing the fierce competition the company faces. The analysts slashed their price target for Geely stock by 38% to just five Hong Kong dollars.

Source