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 baseline
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.
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.