On July 9th the China Association of Automobile Manufacturers (CAAM, the country’s leading car industry association) reported that car production and sales fell by 16.5% and 12.4% respectively year on year in June.

The CAAM data provide an early indicator of weakness in economic performance in June. The automotive sector contributes significantly to industrial production, investment and retail sales, and the car production and sales figures suggest that those indicators will show a further softening when June data are released on July 15th. This supports The Economist Intelligence Unit’s forecast that economic growth will slow to 6.9% year on year in the second quarter of 2021, from 18.5% in the first three months.

The authorities are likely to be concerned about the weakness in economic performance, explaining why the People’s Bank of China (PBC, the central bank) decided on July 9th to make a universal cut to the reserve requirement ratio — more sweeping than we had anticipated — to increase liquidity for the real economy. We had noticed other signs that the government was worried about recent data. For example, e‑commerce platforms did not release their sales data for the “618” online shopping festival in June; they may have been pressured by the government to avoid revealing weak consumer spending.

Based on our analysis, there is a strong relationship between CAAM car production data and official industrial value added, as well as car sales and official retail sales. The same is true for truck and excavator sales and official infrastructure investment data.

A shortage of microchips — a key automotive component — was the main factor weighing on the sector’s performance in June, as it meant that supply could not keep up with demand. Meanwhile, the switch to new emission standards weighed on sales of commercial vehicles. Bright spots were new-energy vehicle (NEV) sales and export sales, which rose by 140% and 150% respectively (albeit from low bases). Export growth was underpinned by the recovery in external demand amid the global vaccine rollout and government stimulus.

We forecast real GDP growth to slow to 6.9% year on year in the second quarter of 2021, which will prompt the government to maintain a neutral (leaning towards accommodative) monetary policy stance and a supportive fiscal policy stance for the rest of the year.

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