China’s car sector seeking new stability amid slumping domestic sales, structural headwinds

SINGAPORE – China’s domestic car market is facing a reality check in 2026, as years of growth and record-breaking sales in 2025 have given way to a sharp retail slump driven by a pullback in government subsidies and low consumer confidence.While analysts anticipate a gradual recovery later in 2026, they say the industry now stands at a structural turning point as it grapples with persistent issues related to a slowing economy, demographic change and cutthroat domestic competition.At the same time, an increasing reliance by Chinese automakers on overseas exports is also being tested by fraught geopolitical tensions and rising trade barriers.“We’ve reached a boiling point,” independent auto analyst Xing Lei told The Straits Times.He cited how Chinese automakers had flooded the market with more than 500 new models in the first half of 2026 as an example of the sector being no longer sustainable.“This can’t go on forever. There has to be some crack somewhere, and we’re seeing that happening now,” he added.According to monthly data released by the China Passenger Car Association (CPCA), a market research platform for the industry, retail car sales in China fell by 20.2 per cent in the first half of 2026 compared with the same period a year ago.The downturn led the association to cut its full-year forecast from flat year-on-year sales to a 14 per cent decline, which it described as “extremely pessimistic”, in a July update.CPCA’s forecast of 20.4 million passenger cars sold by the end of 2026 – down from a record 23.7 million units in 2025 – puts China’s car market on track for its worst year since 2021.But the association also expressed optimism about a turnaround in the short term, pointing to several factors such as an easing of chip shortages that had earlier caused vehicle component prices to spike. “The decline in retail sales is expected to gradually narrow in the third and fourth quarters,” it said.Xing, the auto analyst, said one reason for the fall in domestic car sales in 2026 is the gradual withdrawal of subsidies by Beijing, including the partial removal of a purchase tax exemption for electric and hybrid vehicles at the end of 2025.Since January, such “new energy vehicles”, or NEVs, have been subjected to a levy of 5 per cent, which is is half the usual rate of 10 per cent, instead of getting a full waiver. The policy change led to a late sales push at the end of 2025 and a “wait-and-see” attitude among new buyers in 2026.Demand for budget NEVs has also been impacted by the tightening in 2026 of the terms and conditions of a 20,000 yuan subsidy introduced in 2024 for buyers scrapping older cars or upgrading to electrified options, which had helped to fuel the sale of new passenger cars.A big factor behind the slowing car sales is a lack of willingness by Chinese buyers to spend on big-ticket items amid a gloomy economic climate, said Stephen Dyer, who heads the Asia automotive and industrials practice at consultancy AlixPartners.“The real estate market is down, and it’s continuing to go down, and that affects people’s feeling of wealth and their willingness to spend,” Dyer said. “Pre-Covid-19, consumer confidence was much higher, and it hasn’t reached the same level since then.”However, Bill Russo, founder and chief executive of Shanghai-based consultancy Automobility, said that the weakness in China’s car market is largely structural.“China’s vehicle ownership is reaching maturity in many urban markets, population growth has slowed, and replacement cycles are lengthening. While government incentives may create temporary rebounds, I don’t expect a return to the high-growth environment of the past,” he told ST.Looking ahead, the CPCA said it sees electrification and overseas exports as the core supports for the industry’s long-term growth, but analysts say each of these comes with its own challenges.With domestic sales volumes plateauing, exports have become a lifeline for China’s auto industry. In the first half of 2026, China’s passenger vehicle exports rose 65 per cent to 5.1 million units, with projections suggesting a record 10 million units for the full year.However, the experts warned that the reliance on exports will become more challenging as trade barriers rise and the next phase for Chinese automakers selling overseas will involve localisation, that is, moving manufacturing and supply chains to these foreign markets.Dyer said: “In the auto industry, there’s a rule of thumb that you make cars where you sell them, and that is to mitigate currency exchange risk, supply chain risk, logistics costs, tariffs, etc, over the long term.”On electrification, Russo said NEVs are driving a significant shift in China’s market mix, but they are not fully offsetting weaker demand for internal combustion engine vehicles.“In other words, consumers are increasingly choosing electric instead of gasoline rather than adding incremental vehicle demand,” he said.There is also the issue of ongoing price wars between vehicle manufacturers, which has eroded profitability and added to the industry’s financial strain.Dyer said: “My feeling is the Chinese government will be less aggressive at supporting new growth in the auto industry, and they want to let the market run its course. They’re openly talking about the need to consolidate. And some have even said that in the end there will only be 15 car manufacturers instead of the 70-odd that there are now.”Russo said he believes the Chinese market is searching for a new equilibrium.He added: “Future growth is likely to come from replacement demand, premium intelligent vehicles, and new mobility services rather than simply selling more cars.”