Navigating Regulatory Crossroads: China's Used Car Sector and the Zero-Mileage Crisis

The Chinese automotive sector is at a pivotal juncture, as regulators and state media intensify scrutiny of the "zero-mileage" used car phenomenon—a practice where new vehicles are registered but never driven before being resold as used. This opaque tactic, driven by automakers' pressure to meet sales targets and secure subsidies, has sparked regulatory crackdowns and market volatility. For investors, the fallout offers both risks and opportunities to reassess exposure to industry leaders and emerging compliance players.

Regulatory Risks Escalate: The Zero-Mileage Backlash

The Chinese government's recent focus on curbing zero-mileage sales marks a turning point. In May 2025, the Ministry of Commerce convened automakers like BYD, Dongfeng Motor, and Great Wall Motor to address concerns over market distortion. The practice, which artificially inflates sales figures and misleads consumers about vehicle histories, is now under investigation for potential violations of consumer protection laws and subsidy eligibility criteria.

State media reports have framed the issue as a threat to market integrity, with comparisons to "channel stuffing"—a financial manipulation tactic banned in markets like the U.S. The scrutiny has already triggered investor skepticism: . Analysts warn that stricter regulations could force automakers to abandon short-term sales gimmicks, reshaping industry dynamics.

Market Impact: Winners and Losers in the Shakeout

The regulatory backlash has exposed vulnerabilities among automakers reliant on aggressive discounting. Companies such as Zhejiang Leapmotor, which saw shares plummet 3.1%, face immediate headwinds as investors reassess their ability to sustain sales without deceptive tactics. Meanwhile, automakers with strong brand equity and transparent sales practices—such as NIO or Li Auto—may emerge as safer bets.

Used car platforms like Guazi and 58同城 (58.com) are also under pressure. While they benefit from heightened demand for affordable vehicles, their credibility hinges on compliance with new transparency rules. Buyers now demand verified VIN histories and warranty status, which could favor platforms with robust data systems.

Risks for Investors: Beyond the Headlines

The zero-mileage crisis highlights systemic risks in China's automotive sector:
1. Overcapacity and Profit Margins: With 3.5 million unsold passenger cars in April 2025, automakers operating at under 50% capacity face mounting inventory costs. Regulatory enforcement could force them to write down excess stock or accept lower profit margins.
2. Warranty and Legal Liabilities: Consumers buying zero-mileage cars often lose warranty coverage, creating potential litigation risks for automakers if disputes arise over hidden defects or unresolved loans.
3. Second-Hand Market Volatility: Models like the BYD Qin L have seen prices drop 30–40% below MSRP due to oversupply. Such distortions could deter buyers and erode long-term market stability.

Opportunities in the Regulatory Reset

Amid the turmoil, investors can identify strategic opportunities:
- Transparent Players: Automakers and dealers prioritizing transparency—such as those adopting blockchain-based vehicle history tracking—may gain consumer trust and regulatory favor.
- Export Channels: China's second-hand EVs could find demand in markets like Southeast Asia or Russia, where affordability outweighs concerns over mileage. Regulators may soon clarify export policies to alleviate domestic overcapacity.
- Long-Term Value in Innovation: Companies focusing on R&D and quality—rather than sales volume—could thrive as subsidies shift toward rewarding technological advancement.

Investment Strategy: Prioritize Sustainability Over Short-Term Gains

Investors should:
1. Avoid Overexposure to Margin-Cutters: Automakers using zero-mileage tactics to meet sales targets (e.g., Leapmotor) face reputational and financial risks.
2. Focus on Compliance Leaders: Back companies with robust inventory management and transparent sales practices, such as Geely or Tesla China.
3. Monitor Regulatory Developments: Track the Ministry of Commerce's progress in implementing international anti-channel-stuffing frameworks, which could redefine industry standards.
4. Consider Used Car Platforms with Data Edge: Platforms integrating real-time vehicle history checks and warranty verification (e.g., through partnerships with CAAM) may capture market share in a more regulated environment.

Conclusion: A New Era for China's Auto Sector

The zero-mileage scandal underscores a broader shift toward prioritizing market integrity over short-term growth in China's EV boom. While near-term volatility will test investors, the long-term trajectory favors players who align with regulatory goals and consumer needs. As the government tightens oversight, those balancing innovation with transparency will position themselves to lead in a transformed automotive landscape. For now, caution and selective bets remain the watchwords.

The path forward is clear: adapt to regulation or risk obsolescence.