China Considers Extending its EV Subsidies to 2023 (updated)

China EV subsidies were originally set to expire in 2022, along with tax exemption and reduction policies. To tackle the slow growth in the auto industry and stimulate the electric vehicle (EV) market, in the first half of 2023, the Chinese government has partly renewed these support measures.  

On June 21, 2023, China announced a substantial tax incentive package amounting to 520 billion yuan (US$72.3 billion) over a span of four years. This package is specifically designed to provide tax breaks for electric vehicles (EVs) and other environmentally friendly vehicles. It represents the largest tax incentive ever offered by China to the automotive industry, reflecting the government’s efforts to stimulate growth in the face of sluggish auto sales. 

The Official Statement from the Ministry of Finance clarifies that, under the newly extended program, New Energy Vehicles (NEVs) that are purchased in the years 2024 and 2025 will be eligible for a complete exemption from purchase tax, which could amount to a maximum of RMB30,000 (US$4,170) per vehicle. However, starting from 2026 until 2027, the exemption will be reduced by half and capped at RMB15,000 (US$2,078). 

UPDATE: China is preparing to further extend the incentives for the purchase of EVs as part of its broader efforts to revive its economy after a slow post-pandemic period. Sources revealed earlier that a potential four-year extension is being considered for certain environmentally-friendly vehicles. Specifically, there is a possibility of extending the purchase tax exemption for EVs and plug-in hybrids priced below RMB 300,000 (US$42,400). China has been actively promoting its EV industry through substantial incentives for consumers and subsidies for automakers. In an executive meeting of the State Council held on June 2, 2023, Prime Minister Li Qiang stressed on the importance of new energy vehicles (NEVs), as they “represent the primary focus of the automobile industry’s transformation and upgrading, offering significant development potential.” As such, the government will be focusing on optimizing the industrial conducting extensive research on critical core technologies like power battery systems, new chassis architectures, and intelligent driving systems.

UPDATE: On September 26, 2022, the Ministry of Finance (MOF), the State Taxation Administration (STA), and the Ministry of Industry and Information Technology (MIIT)  jointly released the Announcement on Continuing Tax Exemptions on Purchases of New Energy Vehicles (Announcement). According to the Announcement, purchases of new energy vehicles (NEVs) that occur between January 1, 2023, and December 31, 2023, will continuously be exempted from vehicle purchase tax. Only NEVs included in the List of NEV Models Exempted from Purchase Tax (List), updated to its 58th batch, are eligible for tax exemption. The Announcement also further maintains tax exemptions on NEVs purchases included in the List before December 31, 2022. 

China is negotiating with manufacturers about extending costly electric vehicle (EV) subsidies that were originally set to expire in 2022. In the Chinese context, EVs refer to battery electric vehicles (BEVs), plug-in hybrid electric vehicles (PHEVs and extended-range electric vehicles included), and fuel cell electric vehicles (FCVs). The goal is to provide support for the industry and expand this critical market.

China’s economy has slowed dramatically in recent months and with it, has its vehicle sales. Since the beginning of 2022, multiple cities and industrial parks across China, including the industrial powerhouse – the Yangtze River Economic Basin – have alternately suspended their production because of COVID-19 prevention and control rules. The pandemic-linked restrictions have resulted in the closure of stores, disruption of supply chains, and reduced consumption expenditure.

Thus, to ramp up consumer interest in China’s EV market, it is reported that various government ministries, such as the Ministry of Information and Industrial Technology (MIIT), are now considering extending incentives to EV customers to 2023. Global and domestic investors have always been paying close attention to the policy changes on EV subsidies, as government incentives are a key driver of growth.

In this article, we examine China’s evolving policy on EV subsidies and how recent economic headwinds influence their trajectory.

The origin of China’s EV subsidies in 2009

China has long been vying to be a global leader in the EV market.

To encourage the adoption of EVs, the Chinese government started to provide generous subsidies for EV purchase in 2009, as EVs were costlier than conventional internal combustion engine (ICE) vehicles. Since then, the central government has spent more than RMB 200 billion on EV subsidies, with local governments supplementing an additional RMB 100 billion – or US$47 billion in total.

In 2014, China announced its plan to extend these subsidies beyond the original 2015 expiration date as part of continued efforts to jump-start plug-in sales and reduce air pollution.

That investment paid off. In 2016, for example, the combined sales of EVs and PHEVs in China increased 62 percent to 336,000 units, making it by far the biggest market for hybrid vehicles worldwide, with a share of 44 percent of global sales. This was an extraordinary outcome, considering that the Chinese market share was only six percent in 2013.

China’s changing attitudes towards EV subsidies: 2015-2020

With sales going up, paying for the EV subsidies became extremely costly for the government. Meanwhile, it was found that multiple factories had deceived authorities to become eligible for subsidies.

The frauds occurred through three main “tricks”:

• Illegally registering vehicles: Manufacturers in China are granted incentives based on the number of EVs sold. Local government agencies generally evaluate the number of vehicle operating permits issued to verify the sales quantities provided by manufacturers. Certain manufacturers obtained licenses through bribing or deceiving local registration authorities without producing electric vehicles or making them without key components, such as batteries and motor controllers. As a result, some subsidized vehicles existed only on paper, rather than on the road.
• Battery swapping: Subsidies in China for electric cars are based on their mileage, which is largely determined by battery capacity. As such, vehicles with longer mileage may be eligible for higher subsidies – the amount of which is calculated directly from the size of the battery in specific types of commercial vehicles. As a result, several manufacturers supplied their test cars with huge batteries for approval tests, then switched back to smaller batteries in the actual production. Due to the lack of effective enforcement, EVs with smaller batteries received subsidies equivalent to those with bigger approved batteries.
• Falsifying clients: Subsidies in China are only granted to manufacturers for EVs that are sold (not just produced). However, the government’s investigation showed that several manufacturers sold vehicles to themselves, and never to end-users. As a result, several subsidized automobiles were built and “sold,” but never reached the hands of purchasers.

The fraud controversy drew widespread criticism of China’s EV policy, with some questioning whether the subsidies should be continued at all.

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To be fair, both in the United States and Europe, fiscal subsidies are a major driver of EV adoption, and the same is true in China. The subsidy fraud, on the other hand, was mostly caused by flaws in policy design and implementation. One important flaw is that the subsidy levels are excessively high and apply to cars of any technical complexity.

For example, a 6-meter-long battery electric bus might have earned up to RMB 0.6 million (US$87,000) in subsidies, half from the national government and half from the local government. This large subsidy surpasses the overall cost of a bus equipped with low-cost technology, giving manufacturers an incentive to deceive the government to earn the subsidy. Another flaw is the absence of effective enforcement mechanisms.

Amid the fraudulent activity, the government released a series of regulatory measures to consolidate the industry and prosecute violators of defrauding the subsidy program. These included raising eligibility standards to qualify as a manufacturer of new energy vehicles (NEVs) in China. Moreover, Beijing revealed a plan to wind down EV subsidies, with 20 percent cuts from 2017 to 2018 and 40 percent cuts from 2019 to 2020. The original idea was to move from direct financial aid to a market-based approach.

Effective from January 1, 2017, the plan featured the following changes:

• A phase out of fiscal incentives: From 2017 through 2020, per-vehicle subsidies were set to gradually decrease by 20 percent from 2016 levels, until the end of the national fiscal incentive program – originally set for 2021.
• Higher technical standards: Vehicles that qualified for subsidies had to meet stricter technical standards. While the prior system of universal incentives was phased down, advanced-technology EVs received preferential treatment.
• Stronger anti-fraud and enforcement mechanisms: Before distributing any subsidies, the government began to verify proof of sale and conducted both regular and random inspections to ensure that vehicles were eligible for incentives. According to the new policy, all NEVs had to be equipped with onboard monitoring systems to allow for real-time monitoring. Moreover, both manufacturers and government staff implicated in fraudulent activities would be subject to severe penalties.
• EV credit system: To compensate for the phase-out of national subsidies, the Chinese government established an EV credit system to mandate that a certain percentage of all vehicles sold by a manufacturer each year must be battery-powered. To avoid financial penalties, automobile manufacturers were required to secure a set number of credits per year beginning in 2018. With each passing year, the conditions for earning credits and qualifying for subsidies got stricter to foster technical growth.

These legislative changes, which were primarily prompted by the high-profile subsidy fraud case, became significant revisions for China’s EV business and regulations. “A loss turned out to be a gain,” as an old Chinese proverb goes, since the new plan helped boosting more confidence in China’s EV market: by the end of 2017, NEVs sales in China still contributed to almost half of the total sales worldwide.

China’s EV subsidies in 2020-2023: Recent developments

Driven by government support, EV sales increased to 3.52 million units in 2021. This trend is expected to continue, with China striving to cut carbon emissions in all fields and a growing market for green consumption. According to the China Association of Automobile Manufacturers, EV sales in China will increase by 47 percent to five million by 2022.

China’s plan of phasing out EV subsidies, meanwhile, was interrupted by the unexpected outbreak of the COVID-19 pandemic. On April 23, 2020, China’s MIIT, the Ministry of Finance (MOF), Ministry of Science and Technology (MOST), and National Development and Reform Commission (NDRC) jointly released a Notice on ‘Optimizing Fiscal Subsidies for Promoting New Energy Vehicles’ (hereafter ‘the Notice’). To support the automobile sector during the downturn caused by the pandemic, the Notice introduced four significant measures besides extending EV subsidies to 2022:

• Tightening technical standards
• A reduction in the subsidies size
• Limitations to car pricing and sales
• Elimination of FCV subsidies in favor of specific promotion packages

China’s NEV market recovered with a 17 percent growth in EV sales in 2020 after a two percent decline in 2019.

The overall design of the latest policy on subsidies resembles past ones – vehicles must meet minimum technical and performance requirements to qualify as recipients of fiscal incentives, and the size of the subsidy is tied to a variety of vehicle specifications and utility parameters.

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For example, the minimum electric range requirement for battery electric passenger cars has been changed from 250 to 300 kilometers (km). Thresholds for electric energy consumption have been raised for all types of BEVs, as well as longer-range plug-in hybrid passenger vehicles, with an electric range of at least 80 kilometers. In addition, the 2020 strategy includes a new maximum pre-subsidy car price, comparable to the EV incentive schemes of the United Kingdom, Germany, and a few other top markets. Moreover, vehicles with battery-swapping functions are exempted from the limit on vehicle price, to promote technology and battery swapping as a business model.

The Notice also announced the gradual reduction of subsidies in various public transport categories, including new-energy urban buses, commercial passenger vehicles, taxis, sanitation vehicles, urban logistics vehicles, mail services vehicles, airport shuttle buses, and government automobiles, which were decreased by 10 percent and 20 percent in 2021 and 2022, respectively. This part of the plan was designed to accelerate the electrification of public transportation.

According to the 2020 policy, only passenger EVs costing less than RMB 300,000 (US$42,376) per unit are eligible for the fiscal incentives, along with the above-mentioned conditions for mileage and power efficiency.

Both domestic and foreign enterprises can apply for government subsidies. For example, Tesla announced its intention on April 30, 2020 (on the same day that the policy became official) to cut the pre-subsidy price of its standard-range Model 3 made in China to maintain eligibility for national subsidies. NIO (in Chinese: 蔚来, Wèi lái), a Chinese multinational automobile manufacturer headquartered in Shanghai, has taken advantage of the 400,000 battery swaps performed across China up to 2020 to access the exemption from price limit.

In March 2023, Xin Guobin, the vice minister of industry and information technology, announced that the government will engage in discussions to continue the tax exemption for “the acquisition of new energy vehicles as soon as possible.” This move aims to provide support for the country’s economic growth.

China currently holds the world’s largest market for new energy vehicles, encompassing electric, plug-in hybrid, and fuel-cell models, with total unit sales reaching an impressive 6.88 million in 2022. Furthermore, the market is projected to experience a growth rate of 30 percent this year.

President Xi Jinping has set a goal to nurture Chinese-developed cars into globally competitive brands and elaborated on plans to support this growth as a key industry for the nation. As part of these efforts, the government intends to accelerate the adoption of electric vehicles by incorporating them into its own fleet. Additionally, pilot programs will be implemented to encourage sectors such as taxis, logistics, and sanitation to utilize EVs.

Does the proposed extension indicate China is no longer phasing out EV subsidies?

We do not think so. In the long term, China aims to decouple the growth of the EV sector from direct subsidies, making it more self-reliant. This is reflected in the State Council’s NEV Industry Development Plan (2021-2035).

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However, in the short term, we do expect some dependency on subsidies as market stability is prioritized and China’s green economy goals are maintained. China Passenger Car Association (CPCA) has forecast that some 5.5 million plug-in EV could be sold in 2022 (6 million units including commercial vehicles). And in Q1 of 2022, EV sales exceeded 1.1 million units, up 130 percent as compared to the same period in 2021.

Moreover, considering that China has vested heavily in building its entire EV supply chain from upstream material, specific auto components, and EV batteries to downstream car design and manufacturing, we have good reason to believe that the government may consider another EV subsidy extension in the near term if there are signs that the phasing out of EV subsidies would seriously dent EV sales.

Relevant stakeholders should pay close attention to China’s market consumption trends.

Subsidies aren’t the only tool in China’s box

China’s success in vehicle electrification is largely due to government initiatives that supported EV manufacture and sales at both the national and provincial levels. Because of the government’s support, EV costs have been pushed down to the same level as traditional vehicles, putting China on the path to the mass adoption of such technology.

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However, as the Chinese EV industry becomes more established, Beijing has been gradually pulling away incentives for new energy cars. In addition, chip shortages have been affecting manufacturers ever since the beginning of the COVID-19 pandemic, along with several other factors, such as a general decrease in demand and issues in the supply chain. These contingencies, paired with reduced subsidies, will raise the cost of electric vehicles overall – the 30 percent drop in NEV subsidies expected for 2022 could result in a hike in the purchasing price, making consumers reconsider their options.

To offset the potential impact of the decreasing subsidies on EV prices (and thus, risking a loss in sales), local companies like XPeng (in Chinese小鹏汽车, Xiǎopéng Qìchē) and NIO have this far either absorbed the subsidy loss or canceled preferential lending programs for potential purchasers – both strategies that could serve foreign businesses as well in dealing with such changes.

Meanwhile, subsidies are not the only way to stimulate the EV market. The Chinese government has set in place other stimulus measures to boost the market and achieve its objectives.

Tax exemption

On April 22, 2020, the Ministry of Finance (MOF), the State Taxation Administration (STA), and the MIIT jointly issued the Announcement about Exempting Vehicle Acquisition Tax for New-Energy Vehicles. The document announced that relevant authorities will exclude NEVs from vehicle purchase tax until the end of 2022. The tax exemption includes PEVs and PHEVs, and FCVs.

EV businesses can apply for tax exemption by uploading their ‘Motor Vehicle Factory Qualification Certificate’ for approval to the MIIT.

Investment in EV infrastructure

Government officials have suggested that impending economic stimulus measures will prioritize investments in “new infrastructure,” which includes, among other things, NEV charging stations, sustainable energy, and the Internet of Things.

If the government invests in NEV charging stations on a large scale, the sector will be strengthened and NEVs will become more appealing to the ordinary customer. Furthermore, extra incentives for renewable energy, high-tech, and research and development may be available to NEV makers.

EV manufacturing and consumption fit perfectly into China’s economic, industrial, and carbon reduction goals, making the industry an important one for the government.

So far, Beijing has stayed steadfast towards meeting its goal of achieving 20 percent EV deployment by 2025. China is the leading power in worldwide lithium-ion battery manufacture, used in most electric cars. While the bulk of the world’s lithium resources are held by other countries, and China imports 80 percent of its needs, the country has already acquired the majority of lithium mines for future production. It indicates that for China, its future will be electric.

This article was originally posted on June 13, 2022, and last updated on June 27, 2023.

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