china considers extending ev tax exemption to put industry back on track after covid-19 lockdown

China is mulling extending the tax exemption on electric vehicle purchases in a bid to help the crucial economic sector regain momentum after being hit hard by the Covid-19 lockdowns.

The State Council, China’s cabinet, expects the tax cuts to spur consumers to spend an additional 200 billion yuan (US$29.8 billion) on buying EVs, Xinhua News Agency reported following a meeting chaired by Premier Li Keqiang on Wednesday. The report did not elaborate on when the cabinet’s decision on the tax policy will be made.

“An extension of the tax exemption is highly expected by the automotive industry,” said Chen Jinzhu, the chief executive of Shanghai Mingliang Auto Service, a consultancy. “A strong automotive industry will effectively boost the national economy and help maintain a high employment rate.”

Beijing, which has exempted buyers of environment-friendly vehicles from paying the 10 per cent purchase tax since September 2014, has seen sales increase sharply as a result of the policy support. The government had, however planned to scrap the incentive at the end of this year.

china considers extending ev tax exemption to put industry back on track after covid-19 lockdown

China’s car industry lost 1 million vehicles in production because of pandemic-related curbs across the country. Photo: Xinhua

An EV with a driving range of more than 400km is currently eligible for a 12,600-yuan subsidy, according to the Ministry of Finance. Beijing plans to cancel government subsidies for EV purchases from 2023, but industry officials predict the incentive may be extended to support the industry.

China, the world’s largest market for conventional and new-energy vehicles, saw NEV sales jump 168 per cent year on year to 2.99 million units in 2021. This year sales of NEVs – pure electric, plug-in hybrid and hydrogen fuel-cell cars – were expected to touch 5.5 million, according to a forecast by the China Passenger Car Association (CPCA) in February.

Chinese EV makers surged on Thursday. Xpeng was the biggest gainer, rising 9.8 per cent to HK$127. Li Auto 9.4 per cent to HK$154.20, while Nio rose 5 per cent to HK$184.20.

Lockdowns in Shanghai, “China’s Motown”, and northeastern Jilin province, a major car manufacturing base, amid a flare-up in Covid-19 outbreak between March and May, however, dealt a heavy blow to the automotive sector, causing major carmakers like Tesla and FAW Group to temporarily halt production and straining the supply chain.

In April, the industry lost 1 million vehicles in production because of pandemic-related curbs across the country. NEV sales also took a blow, slumping 36.5 per cent month on month to 282,000 units. Sales in May improved, but were still 18 per cent lower compared with March.

Production could return to full capacity in July, and incentives such as tax breaks and cash subsidies could help the industry recover quickly because of pent-up demand for NEVs, said Tian Maowei, a sales manager at Yiyou Auto Service in Shanghai.

“Most young drivers now prefer electric cars to internal combustion engine vehicles,” he said.

Banny Lam, head of research at CEB International Investment, said equity traders believed that the government has been closely watching the auto industry because it is an important economic driver correlated to employment, exports and consumer spending.

The mainland’s car industry provides one in every six jobs in China’s workforce of 800 million people, according to analysts’ estimates.

china considers extending ev tax exemption to put industry back on track after covid-19 lockdown

Tesla is planning a second production line close to its existing Gigafactory in Shanghai. Photo: Bloomberg

In late May, Tesla’s Shanghai Gigafactory restored production to the pre-lockdown level, churning out 2,600 Model 3 and Model Y vehicles a day, as local authorities helped to sort out logistics issues and arrange accommodation for its workers during quarantine. Tesla’s largest production base worldwide assembled 484,130 vehicles in 2021, representing 51.7 per cent of its global total of 936,000 units.

Zhuge Yujie, deputy secretary of Communist Party’s Shanghai committee, said on Wednesday that the 810 delegates to the local Party congress, due to start on Saturday, will discuss plans to drive further growth in the Lingang free-trade zone, which is connected to the Yangshan Deep-Water Port by the 32km Donghai Bridge.

President Xi Jinping announced in 2018 that Shanghai will turn Lingang into a boomtown by drawing top-class industrial projects and allowing freer cross-border capital and commodity flows.

Tesla plans to start building a second assembly line in Lingang this year, to increase its annual capacity by 450,000 units.

Additional reporting by Cheryl Heng

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