After coming to a grinding halt in February this year, the Chinese economy is open again and gradually returning to normality. The first sign of this is that the air is hazy once again, which in most parts means only one thing: production lines are back to work. And with the return of industrial output, there comes a steady stream of unavoidable air pollution.
One positive to take away from this though is the increasing output of electric vehicles. In recent years, demand for electric vehicles has surged across China, and due to generous government subsidies, the prices are very reasonable.
The good news for the electric vehicle (EV) industry in China is that the government has recently announced a continuation of their favourable economic policy towards EV manufacturers. This includes the extension of both subsidies and tax breaks till 2022, as well as plans for a huge cash injection of 2.7 billion yuan into battery charging infrastructure across the country.
Whilst the EV industry suffered in the first quarter of 2020, with year-on-year production declining by 60.2% and sales dropping by 56.2%, the government as well as manufacturers are hoping for a quick rebound.
Many Chinese manufacturers are not only optimistic about demand quickly returning, but also in their ability to compete with Tesla in the domestic market. Although Tesla’s brand is much stronger, the age-old issues regarding Chinese quality are beginning to disappear and the fiercely loyal Chinese consumers are becoming increasingly attracted to domestic brands such as Nio and XPeng.
Whilst it will definitely be a number of years before everyone is driving electric, clearing the roads of fuel-burning vehicles is clearly a priority for the Chinese government. They are leading the way in promoting cleaner driving but at the same time burning coal to generate most of their power. There is clearly a conflict of interest here, but perhaps over time, the world’s most populated country will also find a way to generate their power without the need for coal.
An optimistic thought perhaps, but in the world we live in, optimism is a need, and one which we can’t afford to be scarce!
THINK LIKE AN ECONOMIST!
Q1. What is meant by the term subsidy?
Q2. Explain with the use of a diagram, how a subsidy affects the equilibrium price level in the market for electric vehicles.
Q3. Assess the impact that subsidising the market for electric vehicles will have on the environment.
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