Demand in February fell 34 percent, partly due to Spring Festival holidays

Vehicle sales in China lost steam in February following a strong January, but they continue to perform better than the same period last year.

Sales of light vehicles totaled 1.2 million units, up 6 percent from the same period last year. Passenger vehicle sales rose 9 percent to 814,000 units, while light commercial vehicle sales grew nearly 1 percent to 396,000 units.

On a seasonally adjusted basis, sales declined 19 percent to 17.3 million units, down from a record high of 21.4 million units in January last year. The five-month average through February hit 19.3 million units, which is fairly strong and close to our 2011 forecast.

February sales plunged 34 percent from January. Such declines are usual after the Chinese New Year, but it seems worse this year. February 2010 sales dropped just 28 percent.

Demand traditionally rises before the festival, cools while it's underway and then gradually rises afterward.

As well, the surge in January sales and production could be attributed to forward volume from February as most automakers stopped production a week before the New Year.

Rising oil price

Another factor affecting February sales was rising global oil prices in the wake spreading unrest in the Middle East. Domestic prices at the pump rose 4 percent in February.

The possibility of more price increases is further easing sales into the slow lane.

Rising fuel prices will hit large displacement vehicles the hardest, such as those in the mid-sized car segment, where sales fell 6 percent year on year in February.

Except for some of the latest models - the Skoda Superb and Buick's Regal and Lacrosse - sales of most key models took a double-digit dive.

Sales of sub-compact cars and compact cars also weakened with the overall market slowdown, although they still registered a marginal year-on-year growth of 1 percent and 6 percent respectively, but that is thought to be largely due to the tax subsidiary which is about to come to an end.

Yet we are still optimistic about the outlook for the two segments given the rising fuel prices.

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After double-digit growth for 20 consecutive months, the luxury car segment found its sales slowing sharply in February to a mere 6 percent.

While most brands still performed well, the segment leader, Audi, posted a sales decline in excess of 50 percent due to government belt-tightening across the country and restrictions on the number of cars in the capital Beijing.

Vehicle prices remained stable in February with exceptionally strong retail sales in December and January greatly reducing dealer inventories.

But several manufacturers including BYD have started to cut prices and we believe more companies will join the trend in the next few months.

Whatever the short-term outlook, our forecast for this year and after remains unchanged as we believe China's economy will continue to develop and the strong demand in the inland cities will continue.

We expect the natural disasters that hit Japan to have a short-term negative effect on the Japanese carmakers in China.

While we don't expect it to impact most locally produced models, some such as the Corolla and Land Cruiser Prado that import components from Japan could be adversely affected.

Models imported directly from Japan, including most variants of Lexus, Mazda and Mitsubishi, will most certainly have disrupted distribution.

The author is a senior analyst at JD Power and Associates