CHINA BACKS AWAY FROM AUTO BOOM CURBS


2004.02.05
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After almost a year of debate over a policy to restrain growth in the booming auto sector, China�s leaders appear to have decided against issuing the plan, Radio Free Asia (RFA) reports.

Auto manufacturing has been an important engine of economic growth in Shanghai with nationwide private passenger car sales showing an increase of 35 percent last year, compared with 2002. But last April, the State Development and Reform Commission (SDRC) criticized overproduction by China�s automakers, blaming the phenomenon for power shortages and strains on the railways.

Eric Harwit, a China auto industry expert and associate professor of Asian studies at the University of Hawaii, cited an oversupply of cars in China. �A few years out, the car companies are going to be sitting there wondering what are they going to do with their manufacturing investment,� he said.

China is unlikely to become a major car exporter such as Japan and South Korea, either, he said. �I don�t think so. There�s so much competition now in the global automotive industry. You have South Korea that�s probably taking up a lot of the kind of market in the United States that maybe some of the Chinese cars could, [and] Japan is chipping away every single year at the American market.�

The government�s plan�which seems to have followed a pattern of policy debate and consultation, which is increasingly familiar under Premier Wen Jiabao�called for small manufacturers to merge. It would also have set the minimum investment in a car-making venture at 1.5 billion yuan ($180 million) Last year, 95 of China�s 123 automakers produced fewer than 10,000 cars. Seventy of the plants made fewer than 1,000 cars.

While rising demand for cars among China�s growing middle class has eased some fears about over-capacity, a real danger also exists that prices are falling too fast.

�The result may be a good deal for car buyers but a potential disaster for investors if profits from production disappear, as in other deflationary sectors with too much competition and investment,� Glenn Mercer, director of automotive services at McKinsey, told RFA correspondent Michael Lelyveld.

�If enough car companies believe that�that their time to get market share in China is now rather than later�then they will drop price to get market share now, and I think a lot of that is going on,� Mercer said.

Initially, the SDRC had threatened to crack down on small auto assembly operations by raising tariffs for imported cars in kit form to the same level as fully assembled cars. Later that month, Vice Premier Huang Ju repeated that the government was working on the policy. But while warnings were renewed later in the year, no new policy has been issued.

Instead, a report from the official Xinhua news agency said that 10 leading plants now account for nearly 80 percent of China�s car production. It made no mention of the dozens of small plants that were targets of the government�s concern.

The fading away of this proposal reflects a new style of more consultative government since the fourth generation of leaders under President Hu Jintao and Premier Wen Jiabao came to power, analysts said.

�We�re seeing a very strong pattern across a number of policy arenas where there�s more discussion and there�s a real effort to bring people in, and policies emerge only after a lot people have had the opportunity to sound off,� Barry Naughton, China specialist and professor at the University of California in San Diego, told RFA. �I think in a way, the automobile policy fits into that pattern.�

�Slowing down growth is very, very costly,� Naughton said. �It hurts. People have to pay a real price for that. So, there�s got to be a pretty good reason for it. I don�t think the evidence has reached that point where there�s a really compelling reason to do it.� #####

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