In Depth: China’s Auto Industry Braces for a Bumpy 2026

China's auto industry experienced significant growth in 2025, with vehicular sales increasing by 11.4% year-on-year, reaching approximately 31.1 million vehicles in the first 11 months. This increase was primarily driven by government trade-in subsidies, which contributed to enhanced market demand. Industry projections estimate that full-year sales will reach a historic high of 34.5 million vehicles, while exports are forecast to surpass 7 million, reinforcing China's standing as the largest auto exporter globally. However, entering 2026, the industry's confidence is challenged by the reduction in NEV tax breaks, heightened trade barriers in critical international markets, and an ongoing domestic price war, which pressures carmakers' profit margins. Morgan Stanley predicts a 7% decline in domestic passenger vehicle sales for 2026, and sales executives from leading automakers expect annual figures roughly in line with 2025, at 34.4–34.5 million units [para. 1][para. 2][para. 3][para. 4].

The driving force behind sales growth in 2025 was the government’s trade-in subsidy program, which facilitated 11.2 million sales—about one-third of total sales in the first 11 months—directly generating over 4.1 million new auto purchases after accounting for natural replacement demand. In response to ongoing industry challenges, the Chinese government has opted to extend this policy into 2026, although incentives will transition from simple flat-rate subsidies to price-based rebates. For example, scrapping an old vehicle to purchase an NEV can earn the buyer a 12% rebate up to 20,000 yuan ($2,860), while smaller rebates apply for internal combustion and replacement transactions. The extended policy is expected to particularly benefit NEV manufacturers, with forecasts suggesting domestic NEV sales will exceed 20 million in 2026—57% of all car sales, up from around 50% in 2025. The NEV share is projected to reach 70% by 2030. This shift places the Chinese market in the “late majority” phase of adoption, where consumer acceptance of eco-friendly vehicles increases even without major stimulus [para. 5][para. 6][para. 7][para. 8][para. 9][para. 10][para. 11].

China’s auto exports are also surging, with 6.3 million vehicles shipped in the first 11 months of 2025—an 18.7% year-on-year increase. Notably, NEV exports doubled to 2.3 million units, while traditional vehicle exports fell by 4.1%. Industry leaders emphasize that continued global expansion will be crucial for Chinese automakers, especially given tightening overseas competition and rising trade barriers, particularly in the EU, Mexico, and Brazil. Chinese automakers are responding by expanding localized manufacturing abroad, either through direct investments or by forming joint ventures with local companies to utilize preexisting factories—an “asset-light” approach. It's estimated that in 2026, 12.5% of Chinese vehicles exported will be assembled locally in foreign markets. Chery Automobile Co. exemplifies this trend, having derived a large—and varying—percentage of its revenue from exports over recent years [para. 12][para. 13][para. 14][para. 15][para. 16][para. 17][para. 18][para. 19][para. 20].

Additionally, authorities have tightened export regulations, now requiring all carmakers to obtain export licenses, including for pure electric vehicles, to eliminate unauthorized and unregulated “parallel” exports. This policy is intended to shore up China’s international automotive image and ensure buyers overseas receive proper after-sales support, further professionalizing the country’s auto export reputation [para. 21][para. 22][para. 23][para. 24].