As the Chinese economy shows signs of slowing down, the government has extended the tax exemption for hybrids and electric cars to 2027. Buyers of these so-called new energy vehicles (NEV) skip the purchase tax.

Since 2014, the Chinese government doesn’t impose a ten percent purchase tax on electrified cars to support their adoption and fight the poor air quality in a strongly urbanizing environment. The measure didn’t undershoot its target as China has grown into the world’s biggest EV market in absolute numbers.

Slowing sales

But a sluggish economy and a troubled job market put pressure on that growth. The increase of NEVs reached 41% during the first five months of 2023. What seems like optimistic progress is, in fact, a brake on rapid growth. The surge was no less than 120% in the same period last year.

Several EV brands, with Tesla at the forefront, have already reacted to the trend through an aggressive price war, which has also been adopted by the domestic car brands but poses a tougher challenge for Western carmakers. Though these take 19% of the total market, their share in BEV sales settles for 5% only.

Range anxiety

The prolongation of the incentive doesn’t merely serve as a hedging technique for the brake on registrations but also as a boost for NEV sales in rural areas, where adoption moves at a much lower pace. According to the Chinese Ministry of Finance, the investment in tax exemptions is worth 520 billion yuan (or 66 billion euros). A government directive further stated that the rollout of an extensive charging network would back the incentive.

Range anxiety is one of the obstacles to why the incentive extension to the end of 2027 might overshoot its target. With charging a top worry for Chinese customers and a lot of citizens living in apartment blocks with limited access to charging points, the adoption might face a ceiling.

Vast territory

In China, 70% of the charging infrastructure is located in only one-third of the country. Even though strong development has occurred in recent years (China is the world leader in deploying public charging), the country’s vast territory poses a tremendous challenge. But the incentives can’t remedy this chicken-and-egg problem. Without a charging point, electrified cars don’t make sense.