China’s car market heads for worst year since 2021 as sales fall 20%

China’s car market appears to be headed for its worst year since 2021, as consumer demand for passenger vehicles tumbles following record-high sales in 2025.

After passenger vehicle sales fell by 20.2% in the first half of the year, the China Passenger Car Association lowered its 2026 full-year retail sales projection to a decline of 14% from an earlier forecast of flat year-on-year sales.

It is forecasting a final delivery volume of 20.4 million units at the end of 2026, down from a record 23.7 million units last year. Cumulative sales for the first half of the year currently stand at 8.7 million units.

Xiao Feng, head of Hong Kong/China Industrials Research at Citic CLSA, expects a bleaker outlook than CPCA’s: he projects cumulative auto sales will fall 20% year-on-year, compared to the association’s full-year forecast decline of 14%. Feng remains slightly more optimistic for new energy vehicles (NEVs) such as electric and hybrid cars and vans, seeing NEV sales declining 5% to 6% year-on-year.

“This is going to continue to be a brutal year,” Sino Auto Insights founder Tu Le told CNBC, citing increased competition as original equipment manufacturers fight to seize faltering demand.

Rising fuel costs and a pullback in electric vehicle subsidies have contributed to the struggles of Chinese automakers’ as consumer demand slides.

Transportation energy costs soared 15.3% year-over-year in June, according to data from China’s National Bureau of Statistics, driving the collapse in demand for internal combustion engine (ICE) vehicles. Retail sales of ICE vehicles fell 39% year-on-year in June — with pure gasoline models down 42% — accounting for 78% of the total decline in passenger vehicle sales that month.

Beijing’s pullback of NEV subsidies, which had previously stimulated consumer appetite, has tempered demand for cars in 2026. “Policy only moves demand around,” Feng told CNBC, noting that the lackluster vehicle sales seen so far “could be paying back the frontloaded demand from last year.”

Chinese automakers are being squeezed by rising raw material and component costs, on the other end.

Battery-related input costs — including those for lithium and memory chips — are rising sharply, contributing to an industry-wide plunge in sales profit margins to 3.4% for the period between January and May 2026, while industry profits fell 20% year-on-year, according to CPCA Secretary General Cui Dongshu. Passenger vehicle prices fell by more than 1% year-on-year in June, further narrowing already-slim profit margins.

Feng expects the razor-thin margins to lead to a market…