China’s auto sector hit by new caps on car purchases

The unexpected move by Guangzhou, China’s third largest city, to restrict car purchases by putting a cap on vehicle registrations, led to a selloff in auto stocks on Tuesday, with shares of

DONGFENG GROUP and GREAT WALL MOTOR falling 6.4 percent and 3 percent, respectively.  Beijing, China Keren Su | Getty Images Guangzhou is the fourth city in China - after Beijing, Shanghai

and Guiyang - to limit car sales in order to alleviate traffic conditions and pollution and analysts say the move is negative for the country’s auto sector, as it sets a precedent for other

cities to implement similar measures. “Guangzhou said there would be a small chance that they would implement anything like (the limits imposed by) Beijing at the beginning of this year. It

was a surprise to the auto market and to car buyers,” Steve Man, analyst at Nomura told CNBC on Tuesday. Guangzhou’s program, which ends June 30, 2013, limits the number of registration

plates the city will issue for small and medium-sized passenger cars to 120,000 - approximately half the number of passenger cars registered in 2011. Man says while Guangzhou’s purchase

restrictions alone aren’t going to have a material impact on sales (the city accounts for just 2.5 to 3 percent of total Chinese auto sales) the biggest concern is that more cities could

follow suit. The Southern cities of Shenzhen, Hangzhou and Chengdu could impose similar restrictions, Man says, due to high levels of congestion. In Chengdu, for example, there are 230 cars

per 1000 people. Vivek Vaidya_, _Vice President, Automotive Sector, Frost & Sullivan agrees there is a high risk that other cities with elevated levels of congestion will use car

purchase restrictions to ease traffic conditions. “Any city that’s ready with alternative public transportation could implement purchase restrictions, Vaidya said. “If in the next year, 2-3

cities join, this will impact sales growth for automakers in China.” China’s auto sales, which slowed sharply in 2011 as the government rolled back tax incentives for small cars, recovered

steadily in the first half of this year. According to Nomura, auto sales will climb 6.5 percent in 2012 after a 5.2 percent gain in 2011. But that’s still a long way from a 33 percent sales

growth for the industry in 2010. “If Shenzhen, which accounts for 2.5 percent of overall Chinese auto sales, also implemented similar restrictions, then we would see a material impact. It

could impact 1-1.5 percentage points of growth for the overall passenger auto market,” Man said. According to Man, Guangzhou’s new policy will have the greatest impact on Japanese automakers

because they generate a large portion of their sales in China from the Southern part of the mainland. Guangqi Honda, Guangqi Toyota, Dongfeng-Nissan, Dongfeng-Honda and FAW-Toyota, have a

combined market share of 40 percent in Guangzhou, according to Nomura and so will be the worst affected.