Key metric continues to blow "slowdown" out of the water

Economic slowdown? Risk of hard landing? Car sales rose 24.5 percent in August to cap off a 13-percent increase YTD. Gordon Chang, Jim Chanos, Kyle Bass and the like must be shaking their heads in disgust. China should long have completely melted down by now, long bread lines should long ago have formed in its cities, and the communist regime should be on its last legs.

So successful has the tax cut on small passenger vehicles last October been that a strong case is now being made to make them permanent...what squeezes margins at Chinese and foreign automakers alike will continue to provide a boon to Chinese consumers, on whose shoulders the economy's transition increasingly rests.

Along with rapidly growing residential mortgages, the boom in auto financing is likewise a pillar of the government policy to grow the household slice of the total debt pie and whittle back the corporate slice with the concomitant boost to consumer demand and thereby corporate profitability.

The strong growth of the auto sector alone lends credence to the overall increase in industrial profitability in China in 2016 - after real estate and infrastructure, transport is the main pillar of demand across the entire breadth of capacity-brimming industrial segments nationwide.

With August factory-gate deflation down to just 0.8 percent (from 1.7 percent in July), even as August consumer price inflation has moderated to 1.3 percent, signs are unmistakable that the economy is approaching a healthy pricing equilibrium that strikes the right balance between corporate profitability and consumer affordability, which will be essential to capping and reducing the country's debt-to-GDP ratio.

The PPI figure is particularly startling: it stood at -5.9 percent, i.e. nearly 6 percent deflation, at year-end 2015: in just eight months, it's more than five-sixths of the way back to neutral, belying all the repeated claims that Beijing's policies are still backsliding and the country's economic prospects are still deteriorating.

If anything, before long things might be stable enough at a level satisfactory enough that a real danger of complacency could return to threaten the communist authorities: that would be quite the irony, given what China's gone through in just the last 15 months.

Thankfully, things remain dire in much of the economy and much of the country. As it is, many foot-dragging party officials apparently still need a good kick in the butt in terms of implementing reforms to boost private investment, the stall-out of which remains the biggest threat to recovery.

But the vehicle sales, especially if double-digit or high single-digit expansions persist with extended incentives for consumers, are already a resounding refutation to everyone who's staked either reputation or hard-earned money (or both) on a Chinese crash. It even has another silver lining: the ferocity of competition between Chinese and foreign carmakers alike is likely to put sustained pressure on retail prices, as the big players in an increasingly cutthroat market are forced to compensate for squeezed dealer margins (as little as $10 per premium car now, per above Bloomberg piece) with more sheer volume. That won't just be great news for Chinese consumers: it's a shot in the arm for everyone.