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CHINA Car Sales Look Shiny, on the Surface

China’s car market grew at its fastest pace in six months in June, driven by a tax break—but the rise was padded by a weak year-earlier comparison, and dealer-inventory data paints a gloomier picture.

Foreign and domestic auto makers shipped 1.78 million cars—sedans, sport-utility-vehicles and minivans—to dealers last month, 18% more than year earlier, the China Association of Automobile Manufacturers said on Monday.

Sales bounced in the fourth quarter last year after Beijing halved the purchase tax on small-engine vehicles to 5% from 10%.

In the first half of this year, car sales from manufacturers to dealers were up 9.2% from a year earlier to 11 million vehicles, the government-backed group said. Combined sales of passenger and commercial vehicles were up 8.1%, to 12.8 million units.

And behind the handsome headline sales figures are dealer inventories that tell a different story. An index measuring inventory levels rose to 60% from 51% in May, according to the China Automobile Dealers Association, a government-backed trade group comprising 20,000 dealers. A reading above 50% indicates inventories at worrisome levels.

Higher inventories pushed dealers to offer bigger discounts—10.3% on average in June, compared with 10% in May, according to Ways Consulting Co., a Chinese consulting firm focused on the automotive industry.

Another looming concern is the expiration of the tax break at the end of the year: Analysts have cautioned that the break could be pulling demand forward, meaning growth could once again stall when it ends.

Among major auto makers—which report sales to consumers rather than deliveries to dealers— General Motors Co. sold about 273,500 vehicles last month, up 11% from a year earlier; it cited strong demand for its SUVs and the luxury Cadillac brand. Ford Motor Co. sales were up 3%, to 85,100 vehicles. Nissan Motor Co.’s sales were up 17%, to 109,100 vehicles.

Toyota Motor Corp., though, reported its first down month since December: Sales were off 3.5% from a year earlier, to 97,100 cars, because of dropping sales of its best-selling Corolla sedans.

Backed by generous government subsidies, about 126,000 plug-in vehicles—hybrid and pure electric—were sold in the first five months of 2016, 134% more than a year earlier, said the auto-manufacturers’ group.

Market researcher Nielsen Holdings PLC said its latest survey shows stronger consumer interest in alternative-energy cars than a year earlier, though nearly 50% of respondents said government subsidies still matter greatly in the buying decision.

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