Defying the strict Covid-19 lockdowns in some Chinese cities, the electric vehicle (EV) market rebounded strongly last month. After posting slower growth in April, EVs reclaimed triple-digit sales growth of 105% year-on-year for May. This brought cumulative EV sales over the first five months to over 2 million units, fueling hopes that earlier “forecast[s] for a full-year sales figure topping 5 million units remain achievable,” said Fu Bingfeng, secretary-general of the China Association of Automobile Manufacturers. Last year, some 3.5 million EVs were sold in China. “The Chinese EV market has fully entered the fast lane. Smart cars and web-connected autos will be the next goal,” Fu told a Jun. 10 media briefing.

Based on May data, EV penetration stood at 24% of overall auto sales, up by a whopping 13.8 percentage points from the same month in 2021. If only passenger car models (no larger than nine-seaters) were counted, the EV penetration rate was even higher at over 26% last month.

So far this year, EVs have consistently proven much more resilient against Covid-19-related market disruptions in China than conventional oil-driven vehicles. Contrasting with the triple-digit EV growth rate, overall sales across all auto categories remained stuck in negative territory — posting a near 13% year-on-year decline for May, although this is an improvement from the steeper contraction of 48% during April.

The automobile industry is a pillar of the Chinese manufacturing sector and seen as an economic bellwether. Beijing has therefore announced a rescue package worth 60 billion yuan ($9 billion) to prop up the auto market by reducing vehicle purchase taxes. Auto sales in June will be closely watched for the efficacy of the rescue package, which would impact mostly oil-fueled vehicles.

Tax Cut for Oil-Driven Cars

Starting Jun. 1 and until Dec. 31, the purchase tax would be halved to 5% for vehicles costing 300,000 yuan ($44,600) and below with an engine size no larger than 2 liters, said the finance ministry. The measure would mostly benefit oil-fueled cars, since EVs are already exempt from the purchase tax.

The tax reduction is expected to boost full-year passenger car sales in 2022 by 2 million units, says the China Passenger Car Association (CPCA), which had previously predicted a 6% year-on-year sales decline to 19 million units. “The revised sales forecast of 21 million units in 2022 would reverse the projected sales decline into a 4% growth instead,” CPCA notes in its latest market analysis.

Other analysts are less optimistic about the auto market outlook. Securities research firm UOB KayHian, for example, says it is not tuning up its China passenger car sales forecast despite the tax reduction: “China’s economy has been partially paralyzed by the draconian Covid-19 containment measures. We believe the effectiveness of the stimulus will pretty much hinge upon the recovery of consumer confidence and auto supply chain.”

In addition to the state-directed tax cut, many local governments have also announced other stimuli — such as increasing the quotas for new license plates — to incentivize car purchases.

But EVs are not expected to lose appeal against oil-fueled vehicles, despite not being able to benefit from the purchase tax cut. Many local Chinese governments are dangling cash subsidies for EV buyers. The Beijing municipal government, for example, has announced a 10,000 yuan ($1,480) subsidy for those replacing their existing vehicle with a new EV. In Shenzhen, EV subsidies of between 5,000 yuan and 20,000 yuan per car are also available.

More car buyers are favoring EVs as the current high oil prices are outweighing battery cost increases due to hikes in the prices of metals like lithium and nickel. This is especially apparent in the taxi or rental car segment. “Many cab drivers are now reluctant to drive oil-powered cars in the face of escalating oil prices,” CPCA observes.

Improvements in EV battery performance have also allayed consumer range anxieties: “There has been greater improvement in EV battery performance than in the technology for internal combustion engines,” CPCA notes. The average driving range on a single charge has almost doubled from 253 kilometers (157 miles) in 2016 to above 400 km in 2021, according to data from China’s Ministry of Industry and Information Technology.

And as the expanding EV market hits critical mass, a wider array of EV models catering to different budgets, requirements and tastes is increasing the appeal to Chinese consumers. More foreign automakers like BMW and Volkswagen have also joined US EV manufacturer Tesla in rolling out locally made models.

Although China has been cutting cash subsidies for EVs ahead of a total withdrawal in end-2022, an EV “crediting” scheme is taking over and proving to be a stronger policy driver. Under the scheme, a mandatory minimum EV production ratio that rises over time has been imposed on automakers, which must manufacture and sell more EVs each year. Automakers have to meet an EV ratio of 16% for this year, up from 14% in 2021. Next year, the ratio will rise to 18%. Also, a minimum 80% EV purchase ratio is imposed on government departments and transport service providers when they expand or replace their fleets that operate in pollution-prone zones.