China is the world's largest new car market, with sales of 21m units last year compared with 17.4m in the US. When used cars are included, the US auto market swells to more than 40m units, against less than 30m total passenger car sales in China.
In value terms, the gap between the two markets is even larger. In 2014, the overall value of US car sales was almost $1.2tn, more than twice as large as China's $470bn.
This is not surprising, considering that two-thirds of cars on Chinese roads are less than five years old and 80 per cent of all buyers are first-time drivers. The latter fact explains why crossing an intersection in China can be a harrowing experience for pedestrians. Put another way, an industry that most Americans, Europeans and Japanese have grown up with and now take for granted does not yet even exist in China. Dismiss a shady character as a "used car salesman" and most Chinese people will not understand the reference.
The inevitable rise of what will soon be the world's largest used car market is one such example. While its emergence will initially cannibalise some new car sales — primarily those of cheap domestic brands — the potential for growth is huge. In most developed auto markets, there are at least two used car sales for every one new car sale. In China the ratio is inverted, with roughly three new car transactions for every used car sold.
But a giant new used car market will not spring up by itself. Complicated financial reforms will need to be hammered out in order to facilitate its development.
As Janet Lewis at Macquarie Securities in Hong Kong points out, while regulations governing the sale of used cars vary from province to province, in general dealers must act as brokers between sellers and buyers. That is because value added tax would be incurred if they took temporary ownership of vehicles, putting further strain on already tight cash flows. When such wrinkles are finally ironed out, the inevitable surge in Chinese used car sales will also benefit car manufacturers now contending with a "new normal" of falling margins in what has historically been their most lucrative market.
The emergence of a proper Chinese used car market will help everyone and the world's largest multinational carmakers by boosting dealer profits.