BEIJING, March 13 (Reuters) - Volkswagen VOWG.DE reclaimed car sales dominance in China, the world's largest auto market, in the first two months of 2026 when Toyota 7203.T also regained ground, both overtaking local electric vehicle champion BYD 002594.SZ, 1211.HK amid fading subsidies for greener cars.

VW's Chinese joint ventures with FAW and SAIC 600104.SS held a combined 13.9% share of the country's passenger vehicle market in sales terms, followed by Geely 0175.HK's 13.8% and a combined 7.8% from Toyota's JVs with GAC and FAW, data from the China Passenger Car Association showed.

The legacy automakers' comeback in the market where they have been struggling to catch up with local rivals in EVs comes as purchase tax exemptions on electric cars expire and Beijing scales back subsidies for trading in EVs.

As subsidies fade, hybrid EVs that Toyota specialises in were shown to have steered some consumers away from PHEVs, said Cui Dongshu, secretary-general at CPCA.

Local automakers betting on budget electric and plug-in hybrid vehicles take the biggest hits from the curtailed incentives.

BYD, which unseated VW as the biggest carmaker in China by sales in 2024 and held onto the crown last year, fell to fourth place with 7.1% market share in the January-February period when its overall sales posted the biggest drop since the pandemic.

The biggest competitor to Tesla TSLA.O unveiled its first major battery upgrade in six years last week to revive sales in its home market where a shift toward a value-driven auto market away from bruising price wars is well in motion.

VW has begun mass production of its first model co-developed with Chinese partner Xpeng 9868.HK, the German automaker said on Friday. It is set to launch more than 20 new EV models in China this year alone.

(Reporting by Qiaoyi Li and Ju-min Park; Editing by Emelia Sithole-Matarise)

((qiaoyi.li@thomsonreuters.com;))