China unveils $72 bn tax break for EVs, other green cars to spur demand

China unveiled on Wednesday a 520 billion yuan ($72.3 billion) package to boost sales of electric vehicles (EVs) and other green cars over the next four years to prop up softening auto demand, sending shares of automakers sharply higher.

The package, widely expected after an earlier government pledge to promote the industry, comes as softening sales in the world's biggest auto market has raised concern over economic growth which is losing momentum after a brisk start to the year.

New energy vehicles (NEVs) purchased in 2024 and 2025 will be exempted from purchase tax amounting to as much as 30,000 yuan per vehicle, with the exemption halving for purchases made in 2026 and 2027, the Ministry of Finance said in a statement.

The total tax breaks will amount to 520 billion yuan, Vice Minister of Finance Xu Hongcai said at a press conference.

The move is an extension of the current policy under which NEVs - which include all-battery electric vehicles (EVs), plug-in petrol-electric hybrids and hydrogen fuel-cell vehicles - are exempt from purchase tax until the end of 2023.

"The extension by another four years beat market expectations," said Cui Dongshu, secretary general of the China Passenger Car Association, adding the costly extension of the exemption suggests additional stimulus measures were unlikely.

Chinese auto shares rallied after the announcement, with EV makers NIO and Xpeng rising 6.1% and 5.5% respectively, versus a 1.9% drop in Hong Kong's benchmark index . Li Auto also surged 3.5%.

The announcement follows a June 2 Cabinet meeting during which authorities said they would extend and optimise the tax exemption and study policies to promote NEV development.

The incentives put NEVs, a mainstay of big-ticket spending, on the front burner of a broad-based push to rekindle growth in the world's second-largest economy.

The government heavily promoted NEVs in recent years through incentives that supported the rise of local players such as Li Auto, NIO and BYD.

BYD, backed by Warren Buffett's investment company Berkshire Hathaway, now outsells Volkswagen branded cars in China and became the country's biggest auto maker by sales this year.

Analysts said the cap on the purchase tax exemption would help drive growth of cheaper models that are mainly produced by domestic firms rather than premium vehicles from foreign makers.

NEV sales suffered a hit earlier this year after the government ended a more than decade-long subsidy for EV purchases, but bounced back after automakers including Tesla cut prices to defend market share and after the previous extension of the purchase tax exemption.

"This will aid China's EV growth," said Susan Zou, vice president at researcher Rystad Energy, anticipating EVs sales would grow 30% in 2024, accelerating from 15% estimated this year.

NEV sales rose 10.5% in May from a month earlier, showed data from the China Passenger Car Association. They jumped 60.9% from a year earlier when COVID-19 curbs still roiled auto production and sales.

Wednesday's announcement is the fourth extension. The tax break was announced in 2014 and extended in 2017, 2020 and 2022.