China’s electric vehicle sector has been growing rapidly, with companies such as Nio (NYSE:NIO), Xpeng (NYSE:XPEV) and Li Auto (NASDAQ:LI) scaling production to meet the growing demand. In a recent turn of events, though, the agencies that regulate Chinese EV companies have announced plans to revise a policy that could pose negative effects on them within the coming year. For EV stocks based in China, the proposed policy revisions could mean a difficult road ahead while paving the way to a smoother journey for vehicles reliant on traditional powertrains.
What Is the Dual Credit Policy?
Anyone following the growth of China’s EV sector knows that one of the driving forces behind it has been the dual-credit policy that has helped companies boost revenue. Today brought the announcement, though, that China’s Ministry of Industry and Information Technology (MIIT) is set to revise the policy after a seminar with the Ministry of Finance, Ministry of Commerce, General Administration of Customs and State Administration for Market Regulation that took place on Nov. 19.
According to a statement released following the event, the agencies present agreed that while the dual-credit policy has played an important role for the growth of the sector, revisions have become necessary in order to ensure proper guidance for the industry. The MITT has indicated that these changes will include “reasonably setting subsequent annual credit ratio requirements and [exploring] the establishment of a flexible mechanism.”
To provide broader context, the dual credit policy allows auto manufacturers that do not meet the requirements for fuel consumption control to “offset negative credits from excess fuel consumption with new energy credits they generate, or by buying new energy credits from other companies.” Put another way, these credits are essentially carbon offsets that automakers can buy from EV producers when they don’t meet their emission goals for the year. It serves as another revenue stream for the companies doing the selling and has therefore been a growth driver for EV stocks.
Has It Worked?
The policy has been in place since 2018, and while it hasn’t received much media coverage, that doesn’t mean it hasn’t been effective. According to the MITT, since its implementation, the industry has seen a total of three credit transactions organized, “with a cumulative transaction value of RMB 4.3 billion.”
Between July and August 2021, Nio, Xpeng, Li Auto, Tesla China, and fellow China-based automaker BYD (OTCMKTS:BYDDY), were given the option to sell their credits As CnEVPost reports, this deal was expected to raise significant cash for them while the car companies on the buying end would face high prices for the credit purchases. Both NIO and LI saw prices surge around late July.
What Does It Mean for EV Stocks?
As is often the case when a policy is changed, the companies who had previously benefitted will likely be forced to adjust. These policy changes are likely to cause the prices of credits to drop. EV giant Tesla (NASDAQ:TSLA) is an example of a company that would see its revenue stream negatively affected if this policy were to take hold. That said, Tesla also benefits from selling its credits to U.S. automakers.
For smaller companies, specifically those based in China, the road ahead could be more difficult. Growth has been predicted for stocks like NIO, but these revised policies could hinder progress within the coming year. While all aforementioned Chinese EV stocks are worth watching, this news is certainly worth taking into account for anyone considering a bullish play on the sector.
On the date of publication, Samuel O’Brient did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.