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Car market growth engine sputters in China's hinterland

Pingdingshan, China

WHEN Cao Jun, 40, an engineer from the central Chinese city of Pingdingshan, takes his old, grey MG 3 car to be serviced, he always steals a few moments to pop into the Nissan and Honda dealerships next door.

But the Civic and Sylphy sedans in the showrooms are just eye candy. Mr Cao wants to upgrade his car, but he is facing a steep loan repayment on his flat, medical bills for his wife and a tough local economy in his once-prosperous coal town.

He is far from alone. China's car market, the world's largest, is on the brink of its first sales contraction in almost three decades, according to industry data, a signal of wider economic strains that are rattling the country's leaders in Beijing.

The slowdown - aggravated by a protracted trade war with the United States - is being most sharply felt in smaller, provincial cities such as Pingdingshan, the engines of growth for Chinese consumption of cars and an array of consumer goods.

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China has long hoped to spur consumption in these provincial cities as a way of diversifying an economy long reliant on manufacturing. But a slump in consumption spending is already being seen in things such as cinema ticket sales, online shopping and smartphones purchases.

Part of the reason is that provincial city consumers like Mr Cao are being squeezed tight. Speaking to Reuters as he drove his MG through the outskirts of the city, Mr Cao said that capacity cuts at his main employer - the state-owned coal and chemicals conglomerate Pingmei Shenma Group - meant that his income this year had dropped sharply.

He has taken up driving part-time for the ride-hailing giant Didi Chuxing to make ends meet.

On a salary of around 6,000 yuan (S$1,188) a month, he puts at least 1,000 yuan towards paying off his house loan, 400 yuan on medical bills for his wife and another large chunk on his two daughters' education.

"All these things put together, they slowly start to turn the screw on your life," he said. "I want to drive a better car, but my situation won't allow it." He added that the family had also cut back on luxuries such as long-distance travel and fancy restaurants.

Cutbacks on car purchases by Mr Cao and others like him in China's smaller cities are hitting local car dealers and global automotive makers from General Motors Co to Volkswagen AG .

"The main slowing markets now are those 4-6 tier cities in China," said Xu Haidong, assistant secretary general at the China Association of Automobile Manufacturers, referring to smaller provincial urban centres. "These were the cities leading China's car sales growth in the past few years."

Consumers and car dealers in Pingdingshan all painted a similar picture. The city, 150 km south of the provincial capital Zhengzhou, went through boom years from the 1990s, buoyed by a flourishing coal industry.

But amid a nationwide shift to cut reliance on polluting industries and a sharp shift away from coal, the city has suffered. Pingmei Shenma Group, one of the area's biggest employers, has cut back coal capacity and seen profits fall - creating a ripple effect through the local economy.

The group, like many state-owned firms around the country, reaches far into the community - it operates hospitals and schools, and provides pensions, subsidised housing for workers, water, heating and power.

During the growth years, a family car became a symbol of status and success in the city, driving growth faster than the national average. That has now changed.

"The situation here is really bad. We sold 40 per cent fewer cars in October than September," said Zheng Shuke, a manager at an SAIC-VW dealership near a busy freeway outside Pingdingshan. "This is very unusual in the six years I've been a car dealer."

"I think the biggest reason is that fewer and fewer people have enough money to buy cars," he added. "Our economy used to rely on natural resources. However now due to capacity cuts, fewer people can get the iron rice bowl," a reference to state firms cutting cradle-to-grave welfare support that he said had underpinned spending confidence.

Reuters spoke with 20 consumers, car dealers like Mr Zheng, car finance executives and government officials, mostly in and around Pingdingshan, who said that the car market in the Henan province city had seen a sharp slump this year as consumers tightened their belts.

Henan province is one of China's biggest by car sales with over a million passenger car units sold this year. But growth has stalled sharply, according to data from local consultancy Daas-Auto.

Henan car sales dropped 18 per cent in October after a 25 per cent drop the month before, outstripping a fall in sales nationwide of almost 12 per cent last month, the fourth straight month of declines.

In response, car dealers in Pingdingshan have cut prices to lure buyers, according to dealers and adverts circulated on local social media.

"We're offering discounts, but these just don't seem to be working," said Mr Zheng, the car dealer.

Across town at a 10-year-old dealership for GM-linked Wuling-Baojun cars, manager Jiang Long said that customers had dwindled this year, especially since June.

In front of the store, 100 new cars wait to be sold, but customers were in short supply when Reuters visited. Mr Jiang said that sales were down 40-60 per cent versus last year.

"This is just part of our inventory, we have more in other places," he added. "We make many calls to old customers to attract them to buy new cars, but they just don't seem enthusiastic this year." REUTERS

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