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China’s falling stock market hurts GM, Ford

China’s falling stock market hurts GM, Ford

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China’s falling stock market hurts GM, Ford

The continuing free fall of China’s stock markets may be a temporary correction, but for automakers, including General Motors and Ford, it is the first bump in what once appeared to be a glide path to

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David Craig with America’s Markets. Sometimes the parallels are hard to ignore. Thus is the case with the current Chinese market, bringing back memories of the dot-com crash in 1999.

The continuing free fall of China’s stock markets may be a temporary correction, but for automakers, including General Motors and Ford, it’s the first bump in what once appeared to be a glide path to perpetual growth.

For the last 20 years, China has been the industry’s promised land. A population of 1.4 billion, a growing middle class and projections that sales (19.7 million in 2014) could reach 75 million annually by 2030 created a “what could go wrong?” attitude.

General Motors and Volkswagen were among the first to establish Chinese joint ventures that have profited handsomely. GM now sells more vehicles in China than it does in North America. Ford sales in China are about half its North America total.

Now comes reality.

Earlier this week, GM said sales of 246,066 vehicles from its joint ventures in China increased a negligible 0.4% in June from a year earlier, despite reducing prices by up to 20% on about 40 models. Ford on Wednesday reported sales fell 3% to 83,506 vehicles in June.

“Growth in auto sales is going to slow, in part because of income inequality,” said Linda Lim, professor at the University of Michigan’s Ross School of Business who has studied China’s stunning economic growth over the past quarter century. “In the beginning (automakers) could tap the people who can afford to buy. Demand from that group is fairly saturated.

“Now the automakers are going to have to appeal to people who have less income and these are the people who have lost the most in the stock market.”

Cui Dongshu, secretary-general of the China Passenger Car Association, was more blunt in an interview with Bloomberg.

“The plunging stock market is essentially a meat grinder, shredding money meant for buying cars,” Dongshu said.

The Shanghai index fell 5.9% Wednesday and is down 32% since its peak on June 12. The Shenzhen index fell 2.5% Wednesday and has plunged 40% from its mid-June high.

But the Shanghai index soared 150% over the 12 months before the downturn. The problem is that smaller investors likely are losing the most because they jumped in the market near the top.

Chinese consumers have one of the highest savings rates in the world, which Lim estimates at 40% of income on average.

In the early years the most common place for that money to go was banks, but the interest rates on savings accounts fell below the rate of inflation. Lim said that led to a surge of investment in all kinds of real estate.

But between April 2014 and April 2015 new home prices fell an average of 6.1% in China’s 70 large- and medium-sized cities, according to China’s National Bureau of Statistics.

So over the past year, Lim said, many middle-income Chinese were investing in stocks for the first time.

“The government tried to encourage stock investing by encouraging margin trading (buying stocks with borrowed money),” Lim said. “Many people don’t really understand the stock market, but they believed the government will support it if it falls.”

On July 23 GM will report second-quarter financial results and that will provide the first indication of the impact of slowing sales growth in China. Ford will report second-quarter earnings July 28.

GM shares fell Wednesday to $ 31.19, the lowest closing price since last Dec. 17.

“If we were to take our 2015 GM China income to down 20% year-over-year that would shave $ 0.17 off our $ 4.14 earnings per share estimate,” Citi Research auto analyst Itay Michaeli wrote Wednesday in a note to clients. “While we too are anxious over China, we think GM’s stock is overreacting and maintain our bullish stance.”

Gary Silberg, head of consulting firm KPMG’s automotive practice, said it’s too early to know what the lasting impact of a sharp fall in stock will be.

“What’s very hard for Westerners to grasp is that China is not as transparent with data,” Silberg said. “You always have to be cautious with predictions.”

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