(Yicai) Jan. 15 -- China’s auto market is facing multiple challenges this year and will see a drop in sales, according to the head of China automotive research at UBS Securities.

The country’s electric vehicle sector is forecast to grow 8 percent in 2026, even as overall vehicle wholesales are expected to fall by low single digits and retail sales by mid-single digits, Gong Min said at UBS' 26th China Conference held in Shanghai yesterday.

China has ended the purchase tax exemption for new energy vehicles, with buyers now subject to a 5 percent levy, half the rate applied to internal combustion engine vehicles, Gong noted.

The situation bears some resemblance to late 2022, when China withdrew cash subsidies for NEV buyers. Despite that policy shift, NEV sales surged 37 percent the following year. That growth was partly supported by a plunge in lithium prices from late 2022 into early 2023, which offset some of the subsidy loss. NEV adoption was also at an earlier stage then. Today’s market is far more mature.

Another headwind this year is the adjustment of vehicle trade-in subsidies, particularly for NEVs priced between CNY80,000 and CNY100,000 (USD11,480 and USD14,350). While local government subsidy caps remain broadly similar to last year, proportional rules now vary by price band, reducing support for these lower-priced vehicles.

The combined effect of reduced trade-in subsidies and the new 5 percent buyers tax will increase the effective cost of an NEV in the CNY80,000 to CNY100,000 range by about 10 percent, Gong said, adding that rising raw material prices represent an additional challenge.

Government measures aimed at curbing “self-defeating” price competition have temporarily stabilized the auto market, producing short-term price consistency.

The government’s “anti-involution” measures to tackle cutthroat, self-defeating competition have temporarily steadied the auto market, producing short-term price stability.

Yet automakers are responding with indirect price adjustments, such as configuration tweaks and model renaming. Gong said the government cannot fully control this “invisible hand” of the market, and that encouraging industry consolidation is the only way to address the issue structurally.

Editor: Tom Litting