China on Wednesday unveiled a 520 billion yuan ($72.3 billion) tax break for buyers of electric vehicles (EVs)—its biggest yet for the EV market—in an effort to boost lagging auto sales and consumer spending.

KEY TAKEAWAYS

  • The latest round of EV tax breaks in China will be the biggest yet, totaling an estimated $72.3 billion over four years.
  • Since 2014, cumulative Chinese EV tax breaks have totaled 200 billion yuan ($27.8 billion).
  • Extension of EV tax breaks is meant to spur lagging EV demand in China.
  • China is the world's biggest electric car market, accounting for 60% of global EV sales as of last year.

How Does The China EV Tax Credit Work?

Under the package, buyers of new energy vehicles (NEVs) purchased in 2024 and 2025 will pay up to 30,000 yuan ($4,170) less in purchase tax per vehicle. The tax break will be halved after two years and kept at 15,000 yuan for 2026 and 2027.1

The package lasts for four years, extending previous tax breaks which were first introduced in 2014 and renewed multiple times, most recently last year. As of last year, cumulative tax breaks since 2014 exceeded 200 billion yuan ($27.8 billion), according to Vice Minister of Finance Xu Hongcai. This year’s exemption could eventually top 115 billion yuan ($16 billion), the biggest ever for the industry.1

Shares of some Chinese carmakers rose after the announcement. Nio (NIO) stock was up about 1.2%, while shares of Guangzhou Automobile Group (GNZUF) rose about 1.7% at 10:30 a.m. EDT.

Why Does China Need An EV Tax Credit

China is the world’s biggest electric car market, accounting for 60% of global EV sales last year, according to the International Energy Agency (IEA).2 However, growth in the world’s second-largest economy has slowed, reflecting a broader economic slowdown in the country and prompting officials to offer more financial incentives to spur demand.

Passenger car sales in China rose to 2.05 million in May—the highest in five months—while EV sales at 717,000 were a little shy of the December 2022 peak, according to data from China Association of Automobile Manufacturers.3

China is not the only country turning to tax credits to boost EV demand. The U.S., despite being home to the world's largest EV-maker Tesla (TSLA), implemented its own version of an EV tax credit of up to $7,500 in order to make EV buying more appealing and encourage EV makers to reduce their reliance on Chinese materials for EV production. Given the eligibility criteria, only certain EVs qualify.

China unveils $72 billion tax break for EVs, other green cars to spur demand

Qiaoyi Li and Liz Lee
Tue, June 20, 2023 

A electric car charging station is pictured in a parking lot in Shanghai


By Qiaoyi Li and Liz Lee

BEIJING/SHANGHAI (Reuters) -China unveiled on Wednesday a 520 billion yuan ($72.3 billion) package of tax breaks over four years for electric vehicles (EVs) and other green cars, its biggest yet for the industry as it seeks to boost slower auto sales growth.

Weakening sales growth in the world's biggest auto market has raised concern over China's economic growth and while financial support was widely expected after an earlier government pledge to promote the industry, shares in major automakers jumped after the details were released.

"The extension by another four years beat market expectations," said Cui Dongshu, secretary general of the China Passenger Car Association.

New energy vehicles (NEVs) purchased in 2024 and 2025 will be exempted from purchase tax amounting to as much as 30,000 yuan ($4,170) per vehicle. The exemption will be halved and capped at 15,000 yuan for purchases made in 2026 and 2027, the Ministry of Finance said in a statement.

China had also previously offered a subsidy for EV purchases for more than a decade but the programme ended last year.

Chinese auto shares rallied after the announcement, with EV makers NIO and Xpeng rising 6.1% and 5.5% respectively, versus a 1.9% drop in Hong Kong's benchmark index. Li Auto also surged 3.5%.

The new package extends the current NEV purchase tax exemption which expires at the end of 2023. NEVs include all-battery EVs, plug-in petrol-electric hybrids and hydrogen fuel-cell vehicles.

Cumulative NEV tax breaks, which were first introduced in 2014 and extended three times as recently as in 2022, exceeded 200 billion yuan as of last year, Vice Minister of Finance Xu Hongcai said at a press conference.

Xu said this year's exemption would top 115 billion yuan, indicating the new package of 520 billion yuan would be the biggest ever amount of tax breaks for the industry.

The tax incentives put NEVs on the front burner of a broad-based push to rekindle growth in the world's second-largest economy.

The government heavily promoted NEVs in recent years through incentives that supported the rise of local players such as Li Auto, NIO and BYD.

BYD, backed by Warren Buffett's investment company Berkshire Hathaway, now outsells Volkswagen branded cars in China and became the country's biggest auto maker by sales this year.

Analysts said the cap on the purchase tax exemption would help drive growth of cheaper models that are mainly produced by domestic firms rather than premium vehicles from foreign makers.

NEV sales suffered a hit earlier this year after the government ended the EV purchase subsidy programme, but bounced back after automakers including Tesla cut prices to defend market share and after the previous extension of the purchase tax exemption.

"This will aid China's EV growth," said Susan Zou, vice president at researcher Rystad Energy, anticipating EVs sales would grow 30% in 2024, accelerating from 15% estimated this year.

NEV sales rose 10.5% in May from a month earlier, showed data from the China Passenger Car Association. They jumped 60.9% from a year earlier when COVID-19 curbs still roiled auto production and sales.

Many local governments also announced fresh stimulus measures, expanding various incentives that they began rolling out this year to prop up sales.

The local government in Zhengzhou, capital of central Henan province, said on Wednesday it was handing out car purchase coupons totalling 50 million yuan between June and August, allocating 60% of the amount to NEV purchases.

($1 = 7.1936 Chinese yuan renminbi)

(Reporting by Qiaoyi Li and Liz Lee; Additional reporting by Siyi Liu in Beijing and Donny Kwok in Hong Kong; Editing by Christopher Cushing and Miyoung Kim, Elaine Hardcastle)