Is the market resilient enough to withstand the challenges ahead?

In March, China's light vehicle market showed signs of slowing down, with sales of locally-made models growing by 5.7 percent year-on-year versus the 6.1 percent seen in the first two months of this year.

In the first quarter as a whole, sales of locally-made light vehicles amounted to 5.97 million units, an increase of 6 percent on last year.

Having been subjected to the negative impacts of the economic slowdown and the stricter emissions regulations, China's light commercial vehicle sector has remained subdued since the middle of last year.

The late timing of the Spring Festival holiday this year acted as a further drag, with year-on-year sales of light commercial vehicles dropping by 16.2 percent in March, bringing the year-on-year sales in the sector down by an overall 16 percent in the opening quarter.

In marked contrast, the passenger vehicle sector has shown remarkable resilience so far this year.

With the seasonally adjusted annual rate stabilizing at 21.1 million units in each of the opening months of 2015, year-on-year sales of locally-made models achieved double-digit growth of 12.3 percent in March and 11.6 percent for the first quarter as a whole.

The critical question is whether this will remain the case going forward.

Since the fourth quarter of last year, China's automotive dealers have protested openly about bloated inventory levels－the number of unsold cars on their books－as evidenced by the dealer-level inventory index published on a regular basis by the China Automobile Dealers Association.

Levels surged from 1.42 months in September 2014 to 1.83 months in November of last year, and there have been few signs of any improvement since then; the index stood at 1.77 months at the end of March, indicating an increase of 28 percent on the 1.38 months seen in the same period of last year.

The resilient growth in wholesales apparent since the fourth quarter of 2014 may, in part, have resulted from the amassed stock; however, in light of the greater financial burden that inevitably results from such high inventories, the situation is far from sustainable.

While discounts at dealerships have been increasingly commonplace over the last few months, more recently a number of prominent original equipment manufacturers, or OEMs, have started implementing incentives, too.

On April 6, Shanghai Volkswagen, a market leader in China's passenger vehicle market, announced a reduction of 10,000 yuan ($1,639) in the Manufacturer's Suggested Retail Price, or MSRP, for the Polo and the Touran.

Within as little as a week, other key OEMs followed suit with Changan Ford and Beijing Hyundai, amongst others, mirroring VW's move by introducing various incentives to boost retail sales, leaving little doubt as to the extent of the pressure being exerted by the stagnating growth.

An ailing market is usually characterized by a period of slashed prices, followed by adjustments to OEMs' sales targets.

Ordinarily, we would not expect to see these corrections for a few months. However, one such case came to light only a matter of days ago.

BMW China, which had offered as much as 5.1 billion yuan to its dealerships as compensation for high inventories at the end of last year, announced that it was to lower the sales targets set for its dealers in the second quarter by 15 percent, pointing to the fact that the headwind is also affecting the upper end of the market, which typically enjoys a stronger sales momentum than the mass market.

In terms of the economy, both GDP growth and nominal investment growth in the first quarter slowed considerably to 7 percent and 13.5 percent, respectively, suggesting future downward risks, in particular for the light commercial vehicle sector.

As a counterpoint, consumption grew, albeit only by 10.2 percent year-on-year, versus the 12.2 year-on-year achieved in the same period of last year, adding to our concerns over the gloomy outlook for sales of passenger vehicles.

In light of these warning signs, we believe that the market slowdown, particularly in the passenger vehicle sector, is far from over.

If the sector is to show further double-digit growth in the second quarter, it will have to tackle the serious challenges that lie ahead.

The author is the China forecasting manager of LMC Automotive. bzhu@lmc-auto.com