Incentives for China’s New Energy Vehicles Industry

The Chinese government recently introduced measures to support the new energy vehicle (NEV) industry – electric vehicles, plug-in hybrid vehicles, and fuel cell vehicles – which was hit hard by the COVID-19 coronavirus outbreak.

China is the world’s largest market for NEVs, but the COVID-19 pandemic caused severe disruption in the first quarter of the year. With factories closing and consumers under lockdown as part of efforts to contain the virus, sales of NEVs collapsed in kind.

Now, with the economy gradually returning to normalcy, the Chinese government is seeking to stimulate industries impacted the most by the pandemic – including the NEV industry.

In light of this situation, the Chinese government has extended tax exemptions and subsidies that were set to expire this year and hinted at new investments that could further boost the country’s NEV market in the long run.

While the industry’s recovery will take time, the developments augur well for the future of NEVs in China – already one of the world’s most promising markets for electric vehicles.

Tax exemption extended

On April 22, the Ministry of Finance (MOF), the State Administration of Taxation (SAT), and the Ministry of Industry and Information Technology (MIIT) jointly issued the Announcement about Exempting Vehicle Acquisition Tax for New-Energy Vehicles.

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According to the announcement, relevant authorities will exempt NEVs from vehicle purchase tax from January 1, 2021 to December 31, 2022. In effect, the announcement extends the current exemption on vehicle purchase tax for NEVs for another year, as the exemption was previously set to expire at the end of 2020.

The exemption applies to pure electric vehicles, plug-in hybrid vehicles, and fuel cell vehicles. The specific list of exempted vehicles is listed in the Catalogue of New Energy Vehicle Models Exempted from Vehicle Purchase Tax, which is continually updated by the SAT and the MIIT.

To apply for the exemption, NEV businesses must upload their “Motor Vehicle Factory Qualification Certificate” for transmission to the MIIT and mark the field under “tax exemption” on the form. If approved, the MIIT will automatically give the information to the SAT to enact the exemption.

Subsidies to be phased out

According to a recent announcement by the MOF, China will slash subsidies on NEVs by 10 percent this year. In addition, the MOF said that, in principle, China will further cut subsidies by 20 percent in 2021 and 30 percent in 2022.

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The development comes a month after authorities announced that they would extend subsidies for NEVs through 2022. According to plans initially released in 2015, authorities were set to completely eliminate NEV subsidies this year, but this was reversed due to the impact of COVID-19 on the NEV market.

Besides the subsidies being smaller than before, they will now only apply to passenger cars that cost less than RMB 300,000 (US$42,480) before subsidies. In effect, this demarcation bars luxury NEV lines from qualifying for the subsidies.

The decrease in subsidies and cut-off point for qualification will likely lead NEV manufacturers to adjust their prices. The US electric vehicle company Tesla, for example, increased its prices to reflect the decrease in subsidies. Manufacturers that have products priced just above the cut-off, however, may look to decrease their prices to qualify for the subsidy.

Investment in new infrastructure to benefit new energy vehicles producers

Going forward, macro-level policies set to be released by the central government to spur the national economy will likely benefit NEV producers.

Namely, government officials have hinted that upcoming economic stimulus measures will emphasize investments in “new infrastructure” – which includes NEV charging stations, clean energy, and the Internet of Things, among other areas.

If the government invests in NEV charging stations at scale, it will make NEVs more attractive to the average consumer and strengthen the industry. Further, support for clean energy, high-tech, and research and development could result in additional incentives for which NEV manufacturers may qualify.

While the exact form of government stimulus remains to be seen, NEV manufacturers and parts providers are likely to benefit. More details on China’s stimulus and industries pegged for support will likely be announced when the country’s top leadership convenes for the annual Two Sessions meetings beginning on May 21.

Stimulus measures to boost China market demand

The extension of tax exemptions and subsidies is a positive development for NEV manufacturers in China, even though the subsidies are smaller than before.

China is already the world’s largest NEV market, selling 1.2 million new-energy vehicles last year, and the government has ambitious plans for further growth. Government planners aim to increase NEVs’ share of new auto sales from five percent currently to 25 percent by 2025. To contribute to this goal, authorities have stated that they will prioritize purchasing NEVs when procuring vehicles for government use.

NEV and other auto sales, however, have been among the industries hit the hardest by the COVID-19 outbreak, as consumers refrain from making new purchases amid lockdown measures and economic uncertainty. Even before COVID-19 struck, China’s auto market was experiencing several months of decline.

In the first quarter of 2020 – which coincided with the height of COVID-19 in China – auto sales declined by 42 percent year-on-year. In March, NEV sales fell by over 50 percent compared to the previous year, marking the ninth consecutive month of contraction.

Government support through tax exemptions and subsidies, then, will help NEV manufacturers get back on track and rebound from the COVID-19 disruption. And if the government’s stimulus measures include support for NEV-related infrastructure, the industry will be set not only to recover in the short term, but to flourish in the coming decade.

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