According to a research report from Citi, the Ministry of Finance announced yesterday (the 12th) that the export VAT rebate rate for new energy vehicles will be reduced from 13% to 9%, effective from April 1, 2027, covering all NEV categories including passenger vehicles and commercial vehicles.

The timing and magnitude of the adjustment are in line with market expectations, but the announcement comes on the heels of the China-EU plug-in hybrid agreement statement and weaker-than-expected September passenger vehicle sales. Combined with the bank's conservative outlook for the fourth quarter (projecting an 11.3% year-on-year decline in mainland China EV sales in Q4 2026), this is expected to trigger short-term negative sentiment.

Citi believes the downside risk to fundamentals is limited, as the rebate reduction is equivalent to only about 1.6% to 2% of overseas passenger vehicle retail prices. This can be offset through cuts to dealer rebates, increases to manufacturer suggested retail prices, or cost reductions from economies of scale and falling lithium prices.

Combined with potential EU quotas, Citi further expects Chinese passenger vehicle overseas pricing to rise modestly from fiscal year 2027 onward, evolving in three stages.

The bank explains that export rebates are calculated based on the free-on-board price of vehicles exported by Chinese automakers. It estimates that overseas passenger vehicle retail prices are approximately 2 to 2.5 times the Chinese FOB price, with the gap mainly stemming from import tariffs, logistics, local certification, and dealer profits.

Citi expects the selling prices of China-made hybrid vehicles exported to the EU to rise from 2027. In the first stage, if the quota is a fixed total volume (for example, 350,000 units in the first year), automakers will prioritize allocating higher-margin, higher-priced models rather than low-priced entry-level hybrids, thereby pushing up the average selling price of China's hybrid export mix. In the second stage, if the quota is exhausted early each year, dealers can reduce discounts or even raise prices on major products, driving actual transaction prices higher until they approach the pricing of major global brands such as Volkswagen, Toyota Motor, and Stellantis. In the third stage, EU locally produced hybrid vehicles (not subject to quota restrictions) will compete at existing price levels, limiting the extent to which Chinese hybrid vehicle prices can be raised.