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Don’t Let The Engine Stall

29 October 2018 by lberuti

China first overtook the US as the world’s largest car market in 2009. By then, the country’s economic boom had started creating a new middle class eager to get on the road and show their improved status. It has now become by far the biggest growth engine of almost all car manufacturers. VW, BMW, Daimler, Jaguar Land Rover all have large joint ventures there, and China is a key market for all of them. That is no surprise that all of them reacted positively after it was reported that China is considering slashing tax on cars. Vehicles with engines no bigger than 1.6 litres would see tax fall from 10% to 5%. The move is intended to shore up a market which is facing its first decline since the beginning of the century in the midst of an escalating trade war with the US. Even though the move was not officially confirmed, cars of that engine size account for 70% of passenger vehicles sold, and investors expect the impact to be substantial. They sent the risk premia of all members of the automotive sector tighter, from VW (-8bps @ 104bps) to Schaeffler (-20bps @ -158bps), and made the latter the best performing sector in credit today.