Consumers select new energy vehicles at an auto show held in Chongqing. (Photo/Huxin Luo)

Chongqing - China recently issued a new policy that halves the purchase tax for new energy vehicles (NEVs), reducing the rate from exemption to 5%. This policy change is expected to raise the technical threshold for NEVs in the Chinese market.

The policy raises technical requirements for two categories of NEV. First, plug-in hybrid electric vehicles (PHEVs), including range-extended models, were previously eligible for tax exemptions with a battery range of 43 km. Many buyers chose these cars simply to dodge traffic restrictions, driving them like conventional gasoline vehicles, which did little to improve energy efficiency or cut emissions.

The new regulation raises the minimum battery range for PHEVs from 43 km to 100 km. This change ensures that these models serve their intended purpose of daily electric driving and long trips powered by fuel, rather than exploiting policy loopholes. Industry estimates suggest that 40% of current PHEV models will fail to meet the new requirement.

For example, the BYD Qin PLUS DM-i, which currently offers a 55 km range version, will no longer benefit from the tax exemption by 2026. Consumers will likely shift toward the longer-range version. This policy shift will impact carmakers that rely on low-cost, short-range hybrid models to boost sales.

The second group affected is pure electric vehicles (EVs). The new policy sets tougher energy consumption standards, shifting the focus from how far a car can go to how efficiently it uses energy to get there.

The new standards are designed to phase out inefficient EVs. Some manufacturers have been prioritizing long range by simply increasing battery size, resulting in larger, heavier vehicles with lower energy efficiency.

The policy shift is clear: China aims to move beyond NEV market expansion, using fiscal tools to shift the industry from price competition to a focus on technological innovation. With the new policy, automakers must focus on technological improvements, such as lightweight materials, motor efficiency, and aerodynamic design, rather than engaging in a simplistic race for range.

Compared to other countries' NEV tax subsidy policies, China’s new approach more emphasizes technical standards as the primary driver. For example, in the U.S., under the Inflation Reduction Act, NEVs must source critical minerals and battery components from North America, and avoid parts from certain “foreign entities of concern” to qualify for subsidies.

The European Union takes an “ecosystem” approach, combining purchase subsidies with major investments in charging infrastructure and local battery supply chains, including Northvolt’s gigafactory in Germany. Its goal is to build a self-sustaining, vertically integrated EV industry.

China’s strategy also creates a new playing field for global automakers in China. Global automakers like Volkswagen and Toyota align their R&D in China only with the country’s technical standards, receiving a clear directive: “design a car that meets China’s energy consumption standards.” This is a clear, quantifiable engineering challenge.