Passenger car sales in China are expected to grow around 22 percent this year, an indication the recent industry slowdown is coming to an end, a report on the sector published by Merrill Lynch said.

A vice president of the investment bank’s China equity research, Grace Mak, told a news conference Thursday that an acceleration in auto sales for the world’s third-largest auto market in 2005 would come as prices fall by around 7 percent to 15 percent.

“Volume sales growth is key to profitability in China,” she said.

While she said she expected profit margins for Chinese carmakers to come under further pressure due to the price cuts, the pressure may be alleviated by cost reductions through economies of scale as production volume rises.

Following China’s admission to the World Trade Organization in late 2001, China’s passenger car sales grew at a rapid pace of 57 percent in 2002 and 75 percent in 2003, according to the report. That boom in demand attracted foreign carmakers like Toyota Motor Corp. and General Motors Corp. to aggressively boost their production capacity in China.

However, growth in demand slowed dramatically last year, as government credit-tightening measures aimed at stopping over investment in several industries damped domestic consumer sentiment.

In 2004, passenger car sales grew a modest 15 percent to 2.33 million units.

“We believe the market is currently overly pessimistic on Chinese car demand growth,” Mak said, adding she expected a recovery in the passenger car market this year as the tightening measures come to an end.

However, capacity growth will continue to outpace demand growth for another two years, she said, and would add more downward pressure on prices.

“Capacity utilization will still come down, and will stabilize by 2007,” Mak said.

For the first half of this year, she expected carmakers to report declining profits, due to a high comparison base effect.

Profit growth would become “much more favorable” by the second half, she said.

Some carmakers and parts manufacturers have already begun to scale back production as the pace of sales growth slowed. Last year, Volkswagen, which makes two out of every five cars on China’s roads, said it would not expand car production in China beyond its current 900,000 unit capacity.

(Shenzhen Daily January 17, 2005)