China's Used Car Scandals: Navigating Regulatory Risks and Seizing Transparent Opportunities

The Chinese used car market, once a symbol of economic dynamism, has become a battleground for integrity. A series of scandals involving "zero-mileage" vehicles—new cars fraudulently sold as used—has exposed systemic vulnerabilities in sales practices, regulatory oversight, and consumer trust. As automakers and dealers scramble to offload overproduced inventory, the fallout has sparked a regulatory crackdown that could reshape industry dynamics. For investors, this turmoil presents both risks and rewards, favoring firms that prioritize transparency over short-term gains.

The Scandal Unfolds: Overcapacity Fuels Fraud

The "zero-mileage" phenomenon began in 2023 as automakers faced a perfect storm: overproduction, subsidies drying up, and a price war that slashed margins. By April 2025, passenger car inventories hit 3.5 million units—a 120,000-unit increase from 2024—forcing manufacturers to resort to creative tactics. Dealers registered new vehicles to affiliated entities, then relisted them as used cars with steep discounts (up to 40% off MSRP). While this boosted sales figures temporarily, it eroded consumer trust and distorted market data. Buyers discovered expired warranties, unresolved loans, and unclear ownership histories, prompting state media to label the practice a "threat to market integrity."

Regulatory Tightening: A New Era of Compliance

The government's response has shifted from tolerance to enforcement. In May 2025, the Ministry of Commerce summoned automakers like BYD (002594.SZ), Great Wall (601633.SH), and platforms like Guazi to address fraudulent sales. Proposed measures include stricter sales reporting rules, penalties for "channel stuffing," and integration with CAAM's vehicle history databases. The crackdown mirrors U.S. Securities and Exchange Commission frameworks, signaling a shift toward global standards.

Winners and Losers: The Market's New Landscape

The regulatory pivot has created clear winners and losers:
- Losers: Aggressive discounters like Zhejiang Leapmotor (which saw shares drop 3.1% in May 2025) face investor skepticism. Automakers reliant on "zero-mileage" gimmicks risk reputational damage and fines.
- Winners: Brands with robust compliance frameworks, such as NIO (NIO) and Li Auto (LI), are gaining favor. Transparent platforms like 58.com and Guazi, if they adopt verified VIN checks and warranty disclosures, could capture market share.

Exports also offer opportunities—if managed ethically. Automakers like Chery have imposed strict controls on unauthorized exports to protect brand equity, while regulators push for quality certification on overseas sales.

Investment Imperatives: Focus on Transparency and Innovation

Investors should prioritize firms demonstrating three key traits:
1. Compliance Strength: Automakers with clear sales reporting and inventory management, such as Geely (09.HK) and Tesla China (TSLA), are less vulnerable to regulatory blowback.
2. Consumer-Centric Models: Companies like NIO, which emphasizes certified pre-owned programs with full warranty coverage, align with shifting buyer preferences.
3. Export-Savvy Strategies: Firms exporting second-hand EVs to Southeast Asia or Russia—provided they meet new quality standards—could capitalize on undersupplied markets.

Avoid automakers with inflated sales figures or opaque practices; their valuations may crater if regulators strip away loophole-driven revenue streams.

Conclusion: The Road to Sustainable Growth

The "zero-mileage" scandal is a wake-up call for China's auto industry. While short-term pain is inevitable—overcapacity, stock volatility, and litigation risks loom—the long-term trajectory favors transparency. Investors who back firms with ethical practices and forward-looking strategies will position themselves to profit as the market stabilizes. The era of selling new cars as used is ending; the next chapter belongs to those who build trust, not loopholes.

Recommendation: Overweight positions in NIO, Li Auto, and Geely while underweighting marginal players like Leapmotor. Monitor the Ministry of Commerce's regulatory rollout for further buying/selling signals.