The Biggest And Hottest Auto Market In The World Is Finally Cooling Off

Last year, vehicle sales grew 16% year-over-year, to a projected 17.9 million private vehicle sales.

But now Nomura's Benjamin Lo expects growth to slow to 12% in 2014.

Lo cites two key reasons for slower auto sales growth 1. Slower GDP growth 2. More restrictions on new car sales as part of an attempt to clamp down on pollution.

"Currently, Beijing, Shanghai, Guangzhou, Tianjin and Guiyang have new cars sales restrictions in place through a quota and/or bidding system for new car license plates. The latest city to adopt new car sales restrictions has been Tianjin, commencing 16 December 2013. Considering the government's focus on air pollution issues, along with increasing traffic congestion, we believe the risk of more cities adopting new car sales restrictions has increased, which may pose downside risks to China's new car sales.

"...Investors are aware of the possibility of more cities imposing new car sales restrictions based on our dialogues with investors. However, we believe the market might start to anticipate similar restrictions spreading into more cities (especially tier-one and tier-two cities in northern China, where air pollution is more severe), thereby creating an overhang on auto share prices in the very near term, i.e., industry risk has risen. The impact to actual sales volume of the OEMs and dealers should be manageable, since their sales efforts have been focusing on lower-tier cities where restriction possibility is much lower.

"Near term, new car sales might actually benefit from the bringing-forward of demand from buyers on worries of more restrictions later. However, sales momentum might taper off during 2Q14F and through the summer months, which also coincided with the industry's slow season."

That being said Nomura does think China's long-term growth prospects look good.