China will cut export tax rebates for new-energy vehicles from April, a move that could squeeze automakers' margins and potentially accelerate consolidation in an industry grappling with fierce price competition.

The Ministry of Finance and State Taxation Administration said Monday that the rebate would be reduced to 9% from 13%. New energy vehicles include both battery electric vehicles and plug-in hybrids.

China's auto industry has been facing declining sales amid slowing domestic demand and subdued consumption. Retail sales of passenger cars fell 28.0% in September from a year earlier to 1.62 million units, according to the China Passenger Car Association.

To offset slowing demand in China's market, many Chinese automakers have turned to overseas markets for growth. In September, exports of China's NEVs more than doubled. Exports of passenger cars rose 74% to 917,000 units last month, CPCA data showed.

Following years of rapid expansion and fierce price competition, policymakers are encouraging consolidation. Last month, Guangzhou Automobile Group said it would acquire a 50% stake in FAW Toyota from FAW Group. Geely and NIO reached a battery swapping and charging partnership.

"The reduction in export VAT rebates is primarily intended to curb industry involution and promote consolidation, favoring stronger and more disciplined OEMs," Bernstein analysts said in a note.

With lower export tax rebate rates, Chinese automakers will need to recalibrate their export strategies, meaning they can no longer simply replicate low-priced models for overseas markets. Companies will have to decide whether to absorb the additional costs or pass them on to buyers.

Given the industry's fierce competition, Chinese automakers are unlikely to meaningfully raise prices, Bernstein analysts said. The near-term impact is expected to manifest as margin compression rather than higher vehicle prices.

Chinese automakers are also facing a more complex environment in Europe, a key overseas market.

The European Union aims to curb a surge of Chinese hybrid cars by capping imports at 350,000 units a year, a senior EU official said after trade talks earlier this month.

Under the plans, the EU will seek to curb Chinese hybrid and plug-in hybrid vehicle imports over the next four years, aiming to more than halve China's projected shipments to the bloc. The official said Monday that the safeguard measures could take effect in early December.

The 27-member bloc imported roughly 107,000 hybrid cars from China in 2024 and around 302,000 in 2025, according to Eurostat data.