China Auto Market Slumps Post Surge: Risk Assessment for Conservative Investors

October's automotive sales plunge in China marks a stark reversal from the late-year surge driven by pre-buying ahead of NEV tax changes. Sales fell 0.8% year-on-year to 2.27 million units, abruptly ending an eight-month streak of growth, according to a GuruTrade report. This collapse followed a record-breaking September fueled by consumers rushing to secure the full NEV purchase tax exemption, which expires after December 2025, as reported by China Daily. The shift from the exemption's complete removal to a 50% cap (capped at 15,000 yuan) effectively compressed near-term demand, leaving October's figures vulnerable once the pre-buying frenzy subsided. While export growth accelerated sharply to 27.7% YoY, domestic weakness now overshadows the sector's momentum. The contraction reflects timing and policy-induced demand distortion rather than underlying structural weakness, but manufacturers face immediate cash flow pressure as volumes dip. Recovery hinges on new stimulus; without measures before the January 2026 deadline, the market risks prolonged stagnation, as noted in a Beijing Post article. The shift underscores the vulnerability of consumer cycles tied to temporary incentives.

October's record sales masked underlying fragility in China's NEV market. The surge was largely a pre-buying surge ahead of the January 2026 tax exemption change, where the full 10% purchase tax waiver becomes a 50% exemption capped sharply at 15,000 yuan per vehicle, as China Daily reported. This artificial spike, while boosting near-term volumes, creates a significant overhang for 2026 demand once the cap bites hard for higher-priced models. Market optimism persists, but it overlooks deeper structural headwinds.

While the government announced a massive 300 billion yuan stimulus package doubling trade-in funds to boost overall sales and scrappage schemes, this national-level support is starkly contradicted by escalating local restrictions. Major megacities like Beijing and Shanghai, already grappling with over 7 million vehicles on their roads by late 2024, are tightening plate quotas specifically targeting NEVs, as the Beijing Post noted. This creates a dangerous policy contradiction: federal dollars flow towards demand stimulation while the very doors to the largest potential markets are being shut tighter.

The regulatory uncertainty stemming from this friction between national stimulus and localized congestion controls is eroding confidence. Automakers face a profound challenge: how to plan production and investment when the demand foundation in critical urban markets is being actively dismantled even as other regions see easing. The projected 13.3 million NEV sales (57% market share) with 20% growth hinges on megacity restrictions being lifted. If plate quotas remain in place beyond Q2 2026, this outlook becomes highly vulnerable, exposing the fragility of the current optimism and underscoring the real risk of a sharper demand correction when the tax policy shift fully impacts, as the Beijing Post noted.

China's auto market showed stark contrasts in October 2025. Domestic sales slumped 0.8% year-on-year to 2.27 million units, ending eight straight months of growth as reduced purchase tax exemptions and fading subsidies dented consumer confidence, according to the GuruTrade report. Sales of electric and plug-in hybrid vehicles slowed sharply to 7.3% growth from September's 15.5%, as China Daily reported. Yet amidst this cooling local demand, exports surged 27.7% YoY, propped up by strong overseas shipments from players like BYD. For luxury automakers like Porsche, this export boom is particularly relevant given their significant exposure to China, but the margin dynamics prove far less rosy than the headline growth suggests. Recent analysis, including a sharp outlook cut from Berenberg, highlights that the supposed margin advantage from exporting to high-demand regions hasn't materialized as expected, acting as a key falsifier against simple assumptions that volume growth automatically translates to higher profits in China. This disconnect underscores a deeper vulnerability: Porsche's strategy of relying on export strength to offset weakening domestic fundamentals now faces scrutiny as the reality of squeezed margins becomes harder to ignore. The company's recent adjustment of its 2025 forecast, linked directly to product planning shifts and Porsche's medium-term ambitions, reflects this growing tension between volume and profitability in its most critical market.

The near-term outlook for Porsche AG remains clouded by policy uncertainty, demanding a defensive posture until January 2026 clarity. While October initially showed weakness in China's auto market, a surge in pre-buying ahead of impending NEV tax changes created record sales, masking underlying fragility, as China Daily reported. Importantly, this rebound is highly policy-dependent: the full exemption on NEV purchase tax (currently 10% of vehicle price) will end on January 1, 2026, shifting to a 50% exemption capped at 15,000 yuan, which could trigger a demand collapse if consumer sentiment shifts, as China Daily reported. This volatility underscores our core risk guardrails. We monitor delivery cycles and order fulfillment; any sustained delivery cycle exceeding 55 days or an orders/shipments ratio falling below 0.8 signals weakening momentum and warrants position reductions, as noted in the GuruTrade report. Cash preservation is paramount until this regulatory overhang lifts. Although significant stimulus measures are in play – including doubled special treasury bond funding (300 billion yuan) for trade-in programs – these are unlikely to offset the direct impact of the tax change on purchase decisions in the critical January period, as the Beijing Post noted. Furthermore, regulatory uncertainty persists regarding megacity plate quotas, adding another layer of risk in key markets, as the Beijing Post noted. Export profitability remains a key variable; we will only consider shifting from a defensive stance once sustained export growth demonstrates resilience beyond temporary policy-driven surges. For now, volatility is expected, and proactive risk management is essential.