China has released details of a developmentplan for the new-energy vehicle industry as it seeks to shore up the world’slargest car market and revitalise an economy hard hit by the coronaviruspandemic.

In a statement published on October 9, thegovernment said the focus of the plan was to unify the domestic market, improveindustrial concentration and sharpen market competitiveness. That would includethe construction of more charging facilities and filling stations forelectricity- and hydrogen-powered cars, as well as the wider use of new-energyvehicles by government agencies, it said.

Also, by next year, at least 80 per cent ofall public sector vehicles – including buses, taxis and municipal trucks –operating in ecological pilot zones and areas with high levels of air pollutionwould be driven by clean energy, it said.

While China’s economy as a whole is showingsigns of bouncing back after the coronavirus epidemic – recent figures werebolstered by high levels of consumption during the recent National Day holiday– its car sector remains in the doldrums.

One of the major drivers of China’seconomic recovery after the 2008 global financial crisis, the industry hasstruggled in recent years, with sales by volume falling 8.2 per cent in 2019and 2.8 per cent the year before.

In February of this year, with much of thecountry in lockdown, car sales fell by more than 79 per cent year on year.Official figures show August sales grew 11.6 per cent year on year to 2.2million units, but for the first eight months of 2020 dropped by 9.7 per centto 14.6 million.

As a whole, China’s economy fell by 1.2 percent in the first half of the year, though Morgan Stanley has forecast a 5 percent rise in gross domestic product for the third quarter on the back of strongexports and improving consumer spending at home. Standard Chartered Bank waseven more optimistic, forecasting 5.5 per cent growth for the period.

To help revitalise the car market, thegovernment has loosened purchase restrictions in several major cities andintroduced a number of preferential tax policies. Shanghai and Tianjin haveboth increased their annual licence plate quotas, by 40,000 and 35,000respectively, while Beijing has allocated an extra 20,000 plates for new-energyvehicles.

In Hubei, the central China province wherethe coronavirus was first identified, the government said earlier this monththat all buyers of new cars between October and March 2021 would be entitled toa subsidy equivalent to 3 per cent of the sales price. Beijing securities firmEssence Securities said in a note that government stimulus policies had “turnedauto sales to positive growth from April” and that it “expected a continuedstrong recovery in the near future”.

The State Council, China's cabinet,stressed measures to stabilize employment to ensure the completion of itsannual target. It also passed a development plan for the country's new energyvehicle (NEV) industry to foster new growth areas of green development,according to a statement issued after a State Council executive meeting chairedby Premier Li Keqiang.

Stressing the importance of employment instabilizing economic fundamentals, the meeting said that despite achievementsmade in the job market in the first eight months of the year, the country stillfaces pressure in stabilizing employment.

Efforts should ensure the implementation ofpolicies that help firms manage difficulties, boost employment, and encourageentrepreneurship. The government also vowed to beef up employment support forkey groups such as college graduates and migrant workers, while encouragingflexible employment and creating jobs through multi-faceted measures.

To meet new demands from green consumption,the meeting approved a plan to boost the country's NEV industry, while givingfull play to the decisive role of the market in resource allocation and guidingan orderly development of the industry.

It also underlined efforts to tackle vitaltechnologies, consolidate the construction of infrastructure including chargingfacilities, and strengthen international cooperation in this field, as well asramp up policies to facilitate the use of NEVs in the public service sector.

To promote higher-level opening-up, thecountry will roll out preferential tax measures concerning internationalshipping in parts of the Guangdong-Hong Kong-Macao Greater Bay Area, accordingto the statement.

The government will give the green light tooriginal equipment manufacturers of NEVs, while allowing manufacturers thathave testing capacity to implement self-inspection and certification ofvehicles. The central government will encourage local authorities to use NEVsfor public services, such as law enforcement, logistics and sanitation, as wellas buses and taxis.

China will introduce battery exchangestations where NEV drivers can change fully charged batteries. This will savebattery purchase costs for NEV owners and shorten charging times. Thegovernment will also speed up construction of charging and battery exchangestations and promote their interconnection.

The central government will finallyencourage local governments to create preferential policies for NEV parking andtraffic management. China in April announced that it will extend governmentsubsidies on NEVs for two years to the end of 2022 and exempt the purchase taxon NEVs for next year and 2022.

Provincial governments have also takenvarious measures to boost NEV sales. Shanghai announced earlier this month thatit will offer a subsidy of 5,000 yuan/unit ($700/unit) to NEVs buyers before 31December this year, following steps introduced by Hainan province, Sichuanprovince and Guangzhou city.

China's NEV production and sales duringJanuary-April were both 205,000 units, down by 44.8pc and 43.4pc from a yearearlier respectively, according to data from China's automotive manufacturersassociation.

In less than a decade China's new energyvehicles (NEV) market has become the largest in the world. In 2018 more than amillion NEVs were sold in China, more than three times the number sold in theUS. However, sales volume of new energy vehicles (NEV) in China were already ina slump after the government cut subsidies in 2019. The coronavirus is nowresulting in a sharp fall for the overall vehicle market, including NEVs. Thedrop in NEV sales is prompting Beijing to consider bringing back incentives,starting with local sources.

To continue the developments of NEV,Chinese government has recently issued more stimulus benefit to increase themarket share of NEV and to make sure the fledgling sector can overcome theunexpected challenges of sales drop worsen by the outbreak of the COVID- 19epidemic which stated to affect business in China from early February thisyear.

Already before the COVID-19 crisis, thelong-term plan to develop the NEV market has been laid out in the Circular ofState Council Auto Industry Adjustment and Recovery Plan (2009) and DevelopmentPlan for Energy-saving and NEV Industry (2012-2020). The plan has beenimplemented top down through the encouraging policies issued by respectiveministries and committees in the past including financial subsidies to bothmanufacturers and end-users and exemption of taxes and expenses; grantingpositive credits of producing NEV to set off the negative credits of producingcombustion engine vehicle under dual credits mechanism,

removing the shareholding and joint venturelimitation for foreign NEV manufacturers to stimulate the domestic market byincreasing competition.

This is partly a recession of thewithdrawal of certain government supportive benefits, primarily of a slash insubsidies based on the Notice to Improve the Application of Financial Subsidiesfor Promotion of NEV issued in March 2019. This withdrawal has indeed causedmost of the decline in NEV Sales in Q2 – Q4 of 2019.

Taking into account above reaction of themarket, industry experts have increasingly voiced their comments and asked toshift the government-driven sales growth to market-driven development. TheMinistry of Industry and Information Technology (MIIT) in April issued thedraft to revise the No. 39 Notice of Regulation on Access Review for New-EnergyVehicle Manufacturers and Products to relax the starting threshold for NEVmanufacturing but tighten up the product-end standard.

The draft revision has deleted the Section1 of the requirements on design and development capability in Appendix I AccessReview of Notice No. 39. The Access Review will focus more on the remainingcriteria in Appendix I about the capacity for production, product conformity,after-sale service and safety assurance as the overall technical guarantee onthe NEV products. Also, NEV manufacturers which suspend production for at least12 months should be published by the MIIT. However, the amendments double to aperiod of 24 months, keeping in line with the stipulation of the Measures forthe Administration of On-road Vehicle Manufacturers.

In terms of product standards, the draftrevision updated four technical standards, and added six new standards to improvethe overall angles of products review. The changes to lower the market accessthreshold came after the State Council's decision in late March to extendsubsidies for NEV to 2022 to correct the oversteering. Therefore, the stage isset for rest of the NEV market in China. In the following you find the keyrequirements for foreign investors to enter Chinese NEV market.

Foreign Investment Limitation. Suchlimitation has been lifted in 2018 based on the Special Administrative Measuresfor Access of Foreign Investment (Negative List), consequently foreign investedNEV producers can set up wholly owned manufacturing entity and is no longersubject to the following limitations applicable to fuel consumption vehicleonly as below:

Except for special vehicles and NEV, atleast 50 % shares of a manufacturer producing vehicles shall be held by Chineseshareholders. (Such shareholding limits will be removed for commercial vehiclesin 2020, for passenger car in 2022.) Except for special vehicles and NEV, asingle foreign investor may establish up to 2 JVs to manufacture the same typeof vehicles. (In 2022, limits on the restriction of 2 JVs will be eliminated aswell.)

Investment Approval in Car Manufacturingfor both Foreign and Domestic Entity. In 1994, the Chinese governmentdesignated a number of industries as ‘Pillar Industries’ intended to drive thegrowth of the national economy; the automotive industry was chosen as one ofthese industries. Therefore, in 1994, National Development and ReformCommission ("NDRC"), by its economic planning function, published theAuto Industry Development Policy to promote car manufacturing. In December,2018 the NDRC circulated another related policy document called theAdministrative Rules on Auto Industry Investment.

It is worth noticing that under the AccessReview by MIIT, NEV refers to vehicles using new types of power systems andbeing fully or mainly reliant on new types of energy for automobiles, including1) plug-in hybrid electric vehicles (including extended range electricvehicles), 2) battery electric vehicles, and 3) fuel cell vehicles.

However, under the Administrative Rules onAuto Industry Investment issued by NDRC, the investment approval on NEV may bedifferent between 1) plug-in hybrid electric vehicle and the other two types ofNEV vehicles for the hybrid is deemed as fuel consumption vehicle whereas theother two types are deemed as pure electric vehicle for NDRC approval.

Under the Administrative Rules on AutoIndustry Investment, it is prohibited to set up any new stand-alone hybrid NEVmanufacturing entity. As for the pure electric vehicles, contrary to the AccessReview by MIIT, NDRC will require a R&D institution featuring aprofessional R&D team with the experience and capabilities in: conceptualdesign, system and structural design;

vehicle control system, vehicle powerbattery system, vehicle integration and lightweight research and developmentand corresponding test verification; body and chassis manufacturing, vehiclepower battery system integration, vehicle assembly, etc.; the main technicalindicators of the developed products have reached the industry leading level.

We foresee that the NDRC may lower thethreshold on these R&D requirements case by case to encourage new foreigninvestment and the supervision on final product quality other than themanufacturing capability should be strengthened. NEV manufacturers' capacitiesto guarantee the consistency of their products and the after-sales serviceswill be more highlighted in the future.