China's Market Turmoil Seeps Into The Auto Industry

Transcript

STEVE INSKEEP, HOST:

Let's take a closer look now at the country where the big sell-off started. Chinese markets continue to fall as growth in China continues to slow. For one illustration of what's happening inside the world's second-largest economy, NPR's Shanghai correspondent, Frank Langfitt, went browsing for cars.

FRANK LANGFITT, BYLINE: I'm at the Qianda car dealership in south Shanghai, and I'm looking at the showroom. It's filled with BMWs, and the BMWs are heavily, heavily discounted. I was talking to Liu Jinxian. She runs the dealership. She says these are the biggest discounts she's seen in her 20 years in the car business.

LIU JINXIAN: (Through interpreter) Generally speaking, the BMW 5 Series is 20 percent off. A car that used to sell for $78,000 can now be bought for $62,500. Mercedes-Benz also cuts prices.

LANGFITT: Liu says during the stock market's bull run earlier this year, customers were delighted to pour their earnings into a new vehicle, including these locally-made luxury brands.

JINXIAN: (Through interpreter) When the stock market was good, clients were ready to pay what we asked. They were pretty impulsive. They didn't think much when buying a car.

LANGFITT: Since mid-June, though, the market has plunged, erasing the entire year's gains, leaving investors angry and frustrated.

JINXIAN: (Through interpreter) When we call potential customers, they say currently they aren't considering buying a car because they are trapped in the stock market. Allow me some more time, they say. When I get out of the stock market then I will consider buying.

LANGFITT: Not so long ago, China's car market, the world's largest, looked like a sure thing. There were years when growth exceeded a staggering 30 percent. This June, though, sales began to fall. And in July, they slid 7 percent. Yang Jian is managing editor of Automotive News China, a unit of the Detroit-based trade publication.

YANG JIAN: They say this is a serious problem because in the past 10 years, right, we've never seen anything like this, such a dramatic downturn of the auto market.

LANGFITT: Yang blames the decline in part on the near crash of the stock market but even more so on the broader environment.

JIAN: The fundamental reason is, of course, the economy is stagnating, right, because of the GDP growth in the first half was only 7 percent. Last year, it was 7.4 percent.

LANGFITT: In fact, 7 percent growth would be the envy of any country other than China. But by past standards, when annual growth hit double digits, 7 percent can feel like a slowdown. Li Gan is a professor of economics at Texas A&M. He says the problem with cars is the same as in many sectors in China's economy - too much capacity, too little demand.

LI GAN: We studied more than a hundred goods, major goods. Every good is over capacity.

LANGFITT: That includes computers, as well steel, cement and even apartments in smaller cities. Li says the culprit is the government and its role in directing investment in the economy.

GAN: The big problem is the obsession of the government to maintain a very high growth rate. That incentive has generated government-led effort instead of market-led effort. The point I want to mention is lots of waste.

LANGFITT: For instance, local officials pushed the construction of residential developments that boost GDP but may not have many buyers for years. Under a system that rewards raw GDP growth, that's good for officials' careers but bad for the development of the real economy. Li says one key to fixing China's current problems is continuing to boost consumer spending, which fills Yang Jian, of Automotive News, with hope for the business he covers.

JIAN: For the long-term prospects of the market, I am actually quite optimistic.

LANGFITT: That's because Chinese people's incomes are rising, and many families in smaller cities and rural areas still haven't bought their first cars. Frank Langfitt, NPR News, Shanghai. Transcript provided by NPR, Copyright NPR.