Expansionary Policies Provide a Tailwind to Mainland Chinese Truck Market, but Challenges Remain



The pre-loaded consumption and supply chain disruptions have
clouded the mainland Chinese medium- and heavy-duty truck (MHDT)
market since last summer. With gradual easing of power shortages
and recent injection of policy stimulus, production of MHDT saw
narrowed contraction from November 2021 and will accelerate
restoration in 2022. In our February forecast, we improved the
mainland Chinese MHDT production for 2022 by 5% to 1.18 million
units, still a decline of 19% compared with 2021.

Expanding fiscal spending adds to new demand

To counter mounting economic growth headwinds, fiscal measures
have been shifted from de-risking to stimulative since the fourth
quarter of last year. According to the 2022 government work report,
the tax rebate and cut packages for households, small- and
medium-sized businesses, as well as industries such as
manufacturing, services, and transportation are extended from CNY1
trillion in 2021 to CNY2.5 trillion in 2022. In the transportation
sector, preferential highway tolling and incentives for logistics
will continue to be a part of the scheme, facilitating trucking
recovery to the pre-pandemic norm. In addition, local governments’
borrowing, the main source of infrastructure investment, could
reach CNY4.14 trillion under loosened oversight and early issuance
of special-purpose bonds. Coupled with CNY640 billion of central
budget for major construction projects, these will allow a healthy
growth of infrastructure investment in 2022. Concurrently, the real
estate investment will be accelerated by the ongoing relaxation of
restrictions on the housing market, reflected in consecutive
reduction of mortgage rates and increase of city-level supports to
shore up purchases. Construction truck demand is therefore expected
to go up by 4-6% in 2022 from a 1% expansion in 2021, adding around
15,000 units to the February outlook.

Fine-tuned environmental policies accelerate replacements

The strict implementation of the “Dual Control” of energy
consumption amount and intensity across energy-intensive industries
in 2021 that has greatly aggravated power shortages and curbed
industrial output is eased in 2022 to stabilize industrial growth.
The goal of “Dual Control” policy, turned focus on reduction of
carbon emission. Existing restrictions on annual energy expenditure
of industrial enterprises will be removed, and some of them will be
subsidized with green loans. Meanwhile, the decarbonization agenda
for industries such as steel is adjusted to be less aggressive,
with the deadline of peaking carbon emission being postponed by
five years to 2030. In contrast, downstream regulations on diesel
trucks become stringent. After forcing out around 1.3 million units
CN1-3-level trucks in key regions by 2021, the State Council vows
to basically phase out all below-CN4-level trucks across the nation
by 2025. In particular, Shandong Province, which claims to have
completed elimination of CN3-level trucks, will start to clean
CN4-level trucks from this year. Moreover, for applications such as
transport of bulk commodities, municipal construction, and
sanitation, CN5-level trucks are ordered to be upgraded or
electrified in some regions during 2022-25. Considering our
previous assumptions on continued clearance of CN1-3-level trucks,
the new policies are estimated to bring about 50,000 units more
truck replacements to 2022.

High inventories and multimodal transport weigh on the

Owing to OEMs’ price-off promotions, the pre-buy activity in
preparation for the CN6-a diesel emission rules were greatly
magnified, resulting in an over-storage of CN5-level trucks across
dealer channels in the first half of 2021. By December 2021,
nationwide MHDT inventories are calculated at 275,000 units, still
way higher than the typical rates of 150,000-170,000 units. Roughly
one third of them are CN5-level trucks, despite a national closure
of registrations on January 1, 2022. As expected, the high
inventory pressure will deepen into the first quarter of this year,
before full clearance of CN5-level new trucks (sold as used trucks)
in the market. On the other hand, the transition of 440 million
tons of road transport to railway and waterway transport have made
share of road freight turnover among all transport modes to fall
from 36% in 2018 to 32% in 2021. Such structure will be further
optimized with projected acceleration in railway and waterway
transport for bulk commodities and containers throughout 2025.
Accordingly, long-term baseline demand for heavy trucks will be
weakened by up to 30,000 units .

With de-stocking of CN5-level new trucks and policy stimulus
taking effect, we predict MHDT production to pick up steam from the
second quarter. However, recent outbreaks of Omicron variants and
geopolitical tensions may raise risks in the market. By far, the
pandemic lockdown has led to FAW’s Changchun plant to suspend
production for at least four days in March. In the meantime,
industrial supply chain and logistics are facing increasing
challenges from surging energy and commodity prices caused by the
Russia-Ukraine conflict. Although local OEMs could benefit from
higher exports to Russia during the Western sanctions, the
incremental production will be limited, given a gloomy outlook for
the region in general.

Posted 22 March 2022 by Cassie Liu, Automotive Analyst, IHS Markit

This article was published by S&P Global Mobility and not by S&P Global Ratings, which is a separately managed division of S&P Global.


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