DOMESTIC POLICY FRICTION CAPS NEAR-TERM GROWTH IN CHINA
In February 2026, China’s automotive market declined on both a year-on-year (YoY) and a month-on-month (MoM) basis; however, a narrower drop in terms of the seasonally-adjusted annual rate (SAAR) signals resilient underlying demand. Total volumes reached 1.1 mn units, representing a 33% YoY decline.
The Passenger Vehicle (PV) segment fell by 33% YoY to 966k units, remaining the primary drag on the market’s overall performance, while the Light Commercial Vehicle (LCV) segment posted a moderate 30% YoY decrease to 144k units. The SAAR in February stood at 20.5 mn units, down 5% from the same period last year.
The shift in the 2026 trade-in subsidy from a fixed-amount to percentage-based calculations, together with delayed disbursement of local matching funds—some provinces had not opened application portals by January and February—created a policy vacuum that suppressed replacement demand. This was heightened by the nine-day Spring Festival holiday—the longest on record—which reduced the number of working days and strengthened consumers’ wait-and-see sentiment ahead of the holiday. In addition, the new funding mechanism, which features a “monthly balanced usage” with overall caps and a lottery-based allocation in some regions, has also increased consumer uncertainty.
China’s LV production reached 1.6 mn units in February 2026, down by 22% YoY. PV output, accounting for 88% of total production, fell by 22% YoY to 1.4 mn units, while CV production declined by 21% YoY to 189k units. In terms of OEMs, Chinese brands suffered a sharper contraction, with their combined output down by 24% YoY, while joint ventures remained under pressure, posting a 17% YoY decline. For January–February, cumulative LV production totaled 3.9 mn units, a drop of 11% YoY.
During the month, China’s LV exports reached 631k units, up by 52% YoY despite a modest 1.3% MoM decline. PV shipments drove the surge, rising by 56% YoY to 577k units, while CV exports also posted solid growth, up by 21% YoY to 54k units. This growth was aided by oil price volatility, which amplified the cost advantage of Chinese vehicles—particularly New Energy Vehicles (NEVs)—in global markets.
Based on January–February actuals, we have reduced our 2026 production forecast by 0.2 mn units due to a slower domestic recovery amid policy-transition friction and holiday distortions. However, we have increased the 2027–29 outlooks by an average of 0.3 mn units per year, as oil price volatility enhances Chinese NEVs’ cost advantage and export competitiveness. For 2030–33, we have raised the forecast by 0.5 mn units per year on average, underpinned by continued oil price volatility and China’s diversified energy structure, which supports production-cost stability. Together, these factors are expected to drive sustained overseas demand and boost the long-term production trajectory.
Furthermore, based on current oil market developments, we outline three scenarios for our China LV outlook. Under our baseline scenario of $100–120 per barrel (bbl) of Brent crude, we maintain our current forecast—any forecast adjustments under this scenario would likely stem only from domestic market variations rather than export dynamics. In a quick resolution scenario ($70–80/bbl), lower oil prices would erode the cost advantage of Chinese NEVs, slowing export growth and dampening domestic electrification—this would require us to scale back our 2027–29 production upgrades to +0.2 mn units annually. Conversely, an extended disruption scenario (>$150/bbl) would significantly accelerate global Electric Vehicle (EV) adoption, potentially boosting Chinese exports by 30-35% YoY (8.5 mn units)—under this scenario, our 2027-29 production forecasts could be further raised to +0.4 mn units annually.
NEV production totaled 712k units in February, representing decreases of 15% YoY and 18% MoM, owing to the continued impact of policy factors. The trade-in policy, implemented in March, led some consumers to delay their purchase plans, with a portion of this suppressed demand expected to be gradually fulfilled after March. On the other hand, 2026’s subsidy policy introduced new technical requirements, particularly for Plug-in Hybrid Electric Vehicles (PHEVs), where models with a pure electric range of under 100 km will no longer qualify for subsidies. From the production side, some manufacturers must accelerate inventory clearance while adjusting their capacity plans. Models that do not meet the subsidy requirements will be discontinued and replaced by new products, which also places higher demand on supply chain coordination. Currently, the industry remains in a phase of capacity adjustment. With the outbreak of the US-Israel-Iran war, the shortage of oil has led to rising end-user fuel prices, which is expected to bring about significant structural changes in consumer demand this year. From a cost-of-use perspective, NEVs have become the primary choice. Meanwhile, loyal consumers of Internal Combustion Engines (ICEs) are likely to adopt a wait-and-see approach. If the oil shortage is resolved in the short term, the decline in the fuel vehicle market may slow; however, if the situation persists over the long term, the fuel vehicle market is expected to be rapidly replaced by NEVs.
"Domestic policy friction caps near-term growth in China" was originally created and published by Just Auto, a GlobalData owned brand.
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2026-04-09T16:39:55Z