China rushes to stem price war in autos as passenger car sales drop nearly 20% in January

China moved on Thursday to curb a fierce price war among automakers that has caused massive losses for the industry, after passenger car sales dropped nearly 20% in January from the year before, the fastest pace in almost two years.

The State Administration for Market Regulation released guidelines for manufacturers, dealers and parts suppliers aimed at preventing a race-to-the-bottom price war.

They ban automakers from setting prices below the cost of production to “squeeze out competitors or monopolize the market.” Violators may face “significant legal risks,” the regulator warned.

The rules also target deceptive pricing strategies and price fixing between parts suppliers and auto manufacturers.

Passenger car sales in China fell 19.5% in January from a year earlier, according to the China Association of Automobile Manufacturers. That was the biggest percentage drop since February 2024.

The 1.4 million passenger cars sold in January compared with 2.2 million units sold in December, CAAM said.

Weakening demand reflects a reluctance of cash-strapped buyers to splash out on big purchases. Sales also have suffered from a cut in tax exemptions for EV purchases, coupled with uncertainties over whether trade-in subsidies for EV purchases will continue after some regions phased them out, auto analysts said.

The aggressive price war in China’s auto sector has caused an estimated loss of 471 billion yuan ($68 billion) in output value across the whole industry in the past three years, Li Yanwei, a member of the China Automobile Dealers Association, wrote recently.

Analysts expect domestic demand to dip this year. S&P has forecast sales of light vehicles, including passenger cars, in China will fall up to 3% in 2026.

However, Chinese automakers are gaining ground in global markets. China’s exports of passenger cars jumped 49% year-on-year to 589,000 in January.

“We don’t foresee a loss in momentum for the Chinese auto industry this year,” said Claire Yuan, director of corporate ratings for China autos at S&P Global Ratings.

Chinese automakers such as BYD — the country’s largest and one that overtook Tesla as the world’s top electric vehicle maker — are targeting markets in Europe and Latin America as they confront intense competition in both prices and lineups at home due to oversupply.

Analysts at Citi expect China’s car exports could jump 19% this year driven by exports of electric vehicles and plug-in hybrids.

BYD is targetings around 1.3 million of overseas car sales in 2026, up from the 1.05 million last year. Other major Chinese automakers have also set ambitious sales targets with a focus on exports.

Last month, Canada agreed to cut its hefty 100% tariff on China-made EV imports in a move welcomed by Chinese carmakers. China also recently reached a deal with the European Union that could allow more of its EVs to enter the European market.

Earlier this week, the European Commission accepted a request by the German auto group Volkswagen to exempt import tariffs for one of its China-built EV models under the CUPRA brand — as long as those vehicles are sold at or above an agreed minimum import price — in a first of such exemptions.

China’s commerce ministry said Thursday that it welcomed the move and that it hopes to see more such exemptions.

This story was originally featured on Fortune.com