China plans to kill local subsidies for electric cars

China is planning to tell local governments to stop offering subsidies for electric cars and other new-energy vehicles, according to a report by Bloomberg, a move that could undermine demand for autos made by companies including BYD Co. and BAIC Motor Corp.

The Ministry of Finance is working on a plan that would mandate authorities to phase out the incentives to discourage protectionism and help rein in state expenditure, the people said, asking not to be identified discussing government policy proposals that aren’t yet public. The plan may be implemented as early as next year, one of the people said.

Automakers would still be entitled to the central government’s funds, the people said. The ministry didn’t immediately respond to a fax requesting comments.

The grants have made electric vehicles more affordable in a market that surpassed the U.S. as the world’s biggest in 2015 and one that now accounts for half of global EV use. Subsidies have been a cornerstone of an almost decade-old policy to help promote zero-emission vehicles, but Beijing is reviewing the payouts to iron out some distortions and also to cap costs to the exchequer.

The existing program sets the upper limit of funding based on vehicle performance. Cars that can run at least 250 kilometers (155 miles) on a single charge are entitled to 44,000 yuan ($6,653) of funding from the central government, while local authorities can provide no more than 50 percent of the central grant.

But the wrinkles are in the way local authorities administer their end of the support. Some automakers have complained of invisible barriers for companies based in other provinces or cities. For instance, firms find it time-consuming or difficult to get funding approvals outside of their home city.

Shares of BAIC Motor rose 0.1 percent on Monday in Hong Kong, after declining as much as 2.1 percent. BYD dropped 0.6 percent. Shenzhen-traded Chongqing Changan Automobile Co. slumped 2.7 percent, the most in two months.

China’s central government has spent 59 billion yuan through 2015 on funding purchase of new-energy vehicles, and it may need to set aside 83 billion yuan more for 2016 and the current year, according to estimates by Cui Dongshu, secretary-general of the China Passenger Car Association.

As part of measures to bolster fiscal prudence, China’s government has been scaling back support for the sector.

In 2010, China identified EVs, plug-in hybrids and fuel-cell vehicles in 2010 as a strategic emerging industry that merits state aid. The country is considering ending production and sales of automobiles powered by gasoline and diesel in a few years as it tackles pollution and cuts reliance on oil imports.

Sales of NEVs in the country may jump as much as 50 percent to more than 1 million units in 2018, from an estimated 700,000 this year, according to China Association of Automobile Manufacturers.