S&P Global Ratings expects China's car sales to continue weakening in 2026 even with further subsidies, according to a recent release.
For this year, the government's subsidy program for passenger cars has shifted from a fixed subsidy to one based on a percentage of a new auto's price, S&P said.
The rating agency views the revised subsidy as a means for the government to encourage the industry to adopt higher-value-added production and focus less on lower-end vehicles.
This move would lead to heightened competition for price-sensitive buyers and, together with increased purchase tax on electric vehicles to 5%, bolster already elevated competition and usher in more consolidation, the rating agency said.
Companies such as Geely Automobile Holdings (HKG:0175) and BYD (HKG:1211) will face negative effects on margins and cash flow from the new program, S&P said.
S&P believes policymakers should hone in on a sector that is leaner and more profitable, with surviving companies adopting higher-value production.
However, the rating agency sees industry consolidation and glut removal to be completed in at least three years.
S&P also expects companies' performance to further diverge, with the highest-selling competitors adopting strategic moves and smaller automakers being marginalized.
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