Believe the hype. Chinese consumers are rapidly making the switch to electric vehicles – or “new energy vehicles” as they are known in mainland China, the world’s largest car market. In 2020, sales there jumped 8 per cent, far beyond our expectation, which was for the market to shrink 5 per cent.

With electric vehicle adoption in mainland China clearly happening faster than we thought, we have raised our demand forecasts for this year and next.

Sales were mainly driven by strong policy support and, possibly, a rush to buy ahead of subsidies being cut. In Shanghai, for example, the local government recently restricted the use of cars that are registered outside of the city – a policy that incentivised consumers to buy because new energy vehicles faced no plate restrictions.

For us, however, the bigger story is further ahead. We are more constructive towards mainland China’s electric vehicle growth over the next decade. From the supply side, they are seen as the way forward for most carmakers and remain the bulk of their R&D investment and capital spending. From the demand side, a new generation of consumers is becoming far more open to the idea of electric vehicles.

Given the potential, we have constructed a bull-case scenario for our volume and penetration forecasts as we don’t rule out this shift happening even faster. Electric vehicle conversion and adoption are increasing rapidly, there are more young adults who are more inclined to buy, and the costs are becoming more attractive.

Indeed, China is likely to reach so-called cost parity – where an electric vehicle costs the same as a similar petrol-powered car – ahead of other regions. In a bull case scenario, therefore, electric-car penetration for 2030 could represent more than half of the passenger vehicle market.

One of the major drivers for China’s conversion to electric vehicles is the dual credit system – where vehicle makers receive credits for compliance features such as energy efficiency, or they can buy credits from others, and where they face penalties if they don’t make enough electric vehicles.

Under current regulations, production volumes of electric vehicles for 2021 must more than double from 2020. We estimate 1.3 million sales of electric passenger vehicles are needed for the overall market to be compliant compared with 600,000 in 2020. This will intensify competition as manufacturers will have to meet compliance volume requirements, launch quality products and ensure sufficient scale and profitability.

First published 26 February 2021.

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