China Introduces Novel EV Tax Incentive to Revitalize Sluggish Demand

China on Wednesday introduced a momentous 520 billion yuan ($72.3 billion) fiscal stimulus, custom-tailored for purchasers of electric vehicles (EVs), marking its most substantial incentive ever for the EV industry. This strategic maneuver aims to invigorate sluggish automotive sales and bolster consumer expenditure.

Key TakeAway

• The most recent installment of EV tax advantages in China is set to establish a new record, amassing a projected $72.3 billion across a span of four years.
• From 2014 onwards, the accumulated value of Chinese EV tax incentives has reached 200 billion yuan ($27.8 billion).
• The extension of EV tax benefits is intended to ignite sluggish demand for electric vehicles in China.
• China, the largest electric vehicle marketplace globally, comprises 60% of global EV sales as of the previous year.

What is the Mechanism Behind the China EV Tax Incentive?

Within this package, individuals purchasing new energy vehicles (NEVs) in 2024 and 2025 will enjoy a reduced purchase tax of up to 30,000 yuan ($4,170) per vehicle. The tax relief will be halved after a two-year period and maintained at 15,000 yuan for 2026 and 2027.

This comprehensive package spans four years, extending the previously implemented tax incentives that were initially introduced in 2014 and subsequently renewed multiple times, most recently in the previous year. Vice Minister of Finance, Xu Hongcai, disclosed that cumulative tax exemptions since 2014 surpassed 200 billion yuan ($27.8 billion) as of last year. The current year's exemption may ultimately exceed 115 billion yuan ($16 billion), setting a new industry record.

Following the announcement, certain Chinese automakers experienced an increase in their stock value. Nio (NIO) observed a rise of approximately 1.2%, while Guangzhou Automobile Group (GNZUF) witnessed a growth of around 1.7% as of 10:30 a.m. EDT.

What Necessitates the Implementation of an EV Tax Credit in China?

Based on data from the International Energy Agency (IEA), China holds the title of the world's largest electric car market, accounting for 60% of global EV sales in the previous year.

Nonetheless, the growth of China's economy, the second-largest globally, has decelerated, reflecting a more extensive economic slowdown within the country. This situation has prompted officials to introduce additional financial incentives with the aim of stimulating demand.

In May, passenger car sales in China reached 2.05 million, marking the highest figure in five months. Meanwhile, electric vehicle sales stood at 717,000, slightly below the peak witnessed in December 2022, as per data provided by the China Association of Automobile Manufacturers.

Electric Vehicle Sales in China

China is not singular in its adoption of tax credits as a means to enhance electric vehicle (EV) demand. The United States, despite hosting the world's leading EV manufacturer, Tesla (TSLA), has established its own distinct form of an EV tax credit, which can reach a maximum of $7,500. This initiative aims to render the purchase of EVs more enticing while encouraging EV manufacturers to decrease their dependence on Chinese resources for EV production. Due to specific eligibility requirements, only select EV models are eligible for this credit.