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China is introducing a new tax break for electric cars in a bid to boost lagging demand

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China on Wednesday unveiled a 520 billion yuan ($72.3 billion) tax break for buyers of electric vehicles (EVs) — the biggest yet in the EV market — in a bid to boost lagging auto sales and consumer spending.

Key things

  • The latest round of tax breaks for electric cars in China will be the largest yet, totaling an estimated $72.3 billion over four years.
  • As of 2014, China’s cumulative EV tax credits totaled 200 billion yuan ($27.8 billion).
  • The extension of tax breaks for electric cars is expected to stimulate lagging demand for electric cars in China.
  • China is the world’s largest market for electric cars, accounting for 60% of global electric car sales last year.

How does China’s EV tax credit work?

Under the package, buyers of new energy vehicles (NEVs) purchased in 2024 and 2025 will pay up to 30,000 yuan ($4,170) less in purchase tax per vehicle. The tax break will be halved after two years and will remain at 15,000 yuan for 2026 and 2027.

The package spans four years and extends previous tax breaks that were first introduced in 2014 and have been renewed several times, most recently last year. As of last year, cumulative tax breaks since 2014 had exceeded 200 billion yuan ($27.8 billion), according to Vice Finance Minister Xu Hongcai. This year’s exemption could eventually exceed 115 billion yuan ($16 billion), the highest ever in the industry.

Shares of some Chinese automakers rose after the announcement. Nio (NIO) shares rose 1.2%, while shares of Guangzhou Automobile Group (GNZUF) was up 1.7% at 10:30 a.m. EDT.

Why China needs a tax credit for electric cars

China is the world’s largest electric car market, accounting for an estimated 60% of global EV sales last year. International Energy Agency (IEA). But growth in the world’s second-largest economy slowed, reflecting a broader economic slowdown in the country and prompting officials to offer more fiscal stimulus to spur demand.

China’s passenger car sales rose to 2.05 million in May – the most in five months – while EV sales of 717,000 narrowly missed the December 2022 peak, according to data from the China Association of Automobile Manufacturers.

China isn’t the only country using tax breaks to boost demand for EVs. USA, despite being home to the world’s largest electric car manufacturer, Tesla (TSLA), introduced its own version of the EV tax credit of up to $7,500 to make EV purchases more attractive and encourage EV manufacturers to reduce their dependence on Chinese materials for EV production. Only with respect to the eligibility criteria some EVs qualify.

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