China’s domestic car sales plunged 23.1% year-on-year to 2.8 million vehicles during the first two months of 2026, as fading subsidies and policy changes have dampened demand. New energy vehicles (NEVs) had a particular large drop, with sales falling 27.5% during the period. One big hit to NEV sales was the removal of a tax exemption, which was replaced with a tax rate of 5%–still half the amount of the tax on regular vehicles.
Beijing is ramping up its push for self-sufficiency across a range of sectors—including cars. Foreign car brands have been hit particularly hard by this, with BMW under the added pressure of a fault in its engines resulting in the recall of 147,830 cars across the country. Tesla appears to be the exception to the rule; its China plant saw a 91% rise in sales during February compared to a year earlier—although that comes with a couple of caveats: first, the figure includes exports, and second, it is simply seeing a return to 2024 sales levels following a temporary assembly line suspension last year.
The overall decline in auto sales at the start of this year indicates the importance of subsidies and other forms of stimulus to boost consumption may not be a sustainable strategy. But for now, as policymakers are encouraging domestic players in the vehicle industry, the market will become increasingly difficult for foreign rivals.