The Chinese auto market contracted for the second year in a row with total sales dropping 8.2% in 2019 amid a slowing Chinese economy and trade war uncertainties.

The world's largest car market is expected to continue its slump in 2020, but the industry expects the decline to be restricted to 2%.

A total of 25.8 million vehicles were sold in 2019, compared to 28.1 million in 2018, according to data released by the China Association of Automobile Manufacturers, or CAAM. In 2018, sales declined for the first time in decades, falling 2.8%.

Overall, sales contracted for the 18th consecutive month, with the December sales sliding by 0.1%. Production fell 7.5% to 25.8 million units in 2019, compared to 27.8 million a year before.

CAAM said in a statement that the auto market had faced heightened pressure in 2019, amid lower consumer confidence and other negative economic indicators.

The Chinese GDP grew at 6.2% in the first three quarters, the slowest pace seen in the last few decades. A trade war with the U.S. and the impact of a crackdown on shadow banking affected overall consumer sentiment.

Carmakers faced "a perfect storm" of unfavorable economic trends that hurt mass-market brands, said Bill Russo, founder and CEO of Automobility, a consultancy and private equity firm.

"A slowing economy disproportionately impacts midmarket brands as buyers seek affordable alternatives to new car ownership," Russo said in an interview.

As a result, more and more consumers used mobility services in cities and sales of used cars set a new record in 2019, he added.

As new car sales fell, used car sales grew 4.62% year over year to 11.85 million in the first 10 months of 2019, aided by Beijing lifting restrictions in early 2018 on the relocation of used cars, according to the China Automobile Dealers Association.

The removal of the policy along with the availability of good quality used cars meant that discounts offered by carmakers failed to substantially revive new vehicle sales in 2019.

Stephen Dyer, managing director, AlixPartners, a U.S.-based management consulting firm, pointed out that offering discounts proved to be a counterintuitive move by the carmakers.

"For discretionary purchases, these are large expenditures that consumers can choose when they want to buy. Ironically, discounts can cause consumers to want to wait before purchasing a vehicle because they think prices are going down, they are probably going down further," said Dyer.

While shadow banking is not the biggest channel for car buyers to finance purchases, China's crackdown on shadow banking has further dampened overall economic sentiments, Dyer added.

New energy vehicle sales slide

The new energy vehicle segment saw its first annual sales decline after a stellar growth in earlier years. The sales of clean energy vehicles slid 4% to 1.21 million units in 2019, with monthly sales falling by double digits since the Chinese government slashed subsidies starting late June 2019.

China broadly categorizes plug-in hybrid, battery-electric and fuel-cell powered vehicles as new energy vehicles, or NEVs.

The sharp decline seems to have caught the attention of the Chinese government, which eased its stance on subsidy cuts in the week of Jan. 6.

Miao Wei, minister for industry and information technology, said the NEV purchase subsidies will stay relatively stable this year after announcing at a forum in Beijing that there will be no subsidy cuts in July.

The move is likely to benefit Tesla Inc., which rolled out its first locally built Model 3 last week, as well as BYD Co. Ltd., which was one of the worst-hit by the partial rollback of subsidies in 2019.

Dyer said the announcement was a signal that the government is looking to bolster the sales, especially in the NEV segment.

The NEV purchase subsidies have been set to be replaced by a dual credit system where carmakers are required to purchase credits if they fail to meet a certain production quota of clean energy vehicles.

"The transition to the new credit trading system has not been as smooth as the government imagined," Dyer said. The dual-credit scheme does not incentivize selling NEVs as much as the subsidy scheme, he said.