China's prominent automotive manufacturers, Chery and BYD, are currently facing scrutiny following an industry ministry audit that revealed substantial improper claims for state subsidies. The audit, which covered eco-friendly vehicles sold in the five years leading up to 2020, uncovered questionable claims totaling an approximate $53 million from these two companies alone. This figure represents nearly 60% of the total improper claims identified during the review.

The Ministry of Industry and Information Technology's audit documents, published last month, indicated that a total of 21,725 vehicles should not have received subsidies, amounting to 864.9 million yuan (equivalent to $121 million). Specifically, Chery had 7,663 vehicles disqualified from receiving subsidies, while BYD had 4,973. Neither the ministry nor the affected companies, Chery and BYD, have responded to requests for comment regarding these findings.

While the audit documents did not explicitly detail penalties or mention requirements for reimbursement, the Chinese government has a precedent of requiring automakers to repay subsidies for vehicles that fail to meet established mileage or performance criteria. The potential mandate for repaying these subsidies could significantly compound the challenges already faced by China's automotive sector. The industry is currently contending with issues such as overcapacity, a prolonged and aggressive price war that has eroded profitability, and increasing tensions between manufacturers, dealers, and suppliers.

In response to these market dynamics, China's top leadership has reportedly committed to intensifying regulation over pricing practices and supporting a more structured phase-out of outdated production capacities. This commitment reflects broader efforts to stabilize and streamline the automotive industry. It is noteworthy that China had previously implemented a comprehensive subsidy program for new energy vehicles (NEVs) from 2009 to 2022. This initiative was instrumental in accelerating the adoption of electric, plug-in hybrid, and fuel cell vehicles, successfully leading to monthly NEV sales surpassing those of gasoline-powered cars since March of the previous year.

The current ministry report compiles findings from audits conducted by local governments, which are now extending their reviews to cover the fiscal years of 2021 and 2022. These ongoing audits underscore the government's continued focus on ensuring the proper allocation and utilization of state funds within the rapidly evolving new energy vehicle market.