Battered by pollution and seeking to cut back on fossil fuel consumption, China is moving into the new energy car business dramatically, with a wave of new policies including lifting purchase restrictions through the usual lottery systems in place in some major cities and removing traffic controls while retaining curbs on fossil fuel-powered ones to stimulate EV sales as well as accelerating construction of electric charging infrastructure.

As an indication of the government's resolve, a commitment to green energy vehicles is to be a major theme of the next Five-Year Plan along with a continued push to clean coal and closure of obsolete, polluting coal-fired plans. These new moves aim to resolve the key issue of lack of charging poles, which the government is working to standardize so that one size fits all. Further green policies are expected from both the national and local governments as well. Pure electric vehicles have gained favor over hybrids. All new residential developments are mandated to have corresponding charging stations to take care of electric vehicles.

The entire EV chain, from upstream makers of batteries electric systems to downstream EV makers and charging stations, is expected to benefit, with new energy annual car sales skyrocketing upwards. Annual sales grew at a 123 percent clip between 2011 and 2014 and are expected to rise at a compound annual growth rate of 40 percent through 2020, followed by a 25 percent rate through 2025. Some 136,733 new energy autos were sold in the first three quarters and annual sales are supposed to reach around 200,000 units by year end. To cater to the growing demand, domestic electric or hybrid automakers introduced a full 51 vehicles at the recent Shanghai Auto Show.

Fully electric buses have also enjoyed explosive annual growth, of 328 percent over the first nine months of the year to 8,876 units. Sales are expected to advance rapidly given generous purchase and operating subsidies offered by the government. On the foreign front, EV bus contracts have been signed so far in 2015 by the manufacturer BYD in the United Kingdom, Argentina and Malaysia. Chinese brand electric buses will have a presence in both emerging and developed markets.

Government policymakers, unnerved by the smog choking almost all of the country’s major cities, have been seeking to formulate other new measures aimed at relieving pressure on the environment. The Shenzhen mayor, Xu Qin, plans to convert all public transport to green vehicles within the next three years. More regions are expected to strengthen their environment-friendly plans in the wake of the State Council’s policy guidance.

Existing green car policies should persist in major cities as well. For example, Shanghai is expected to continue offering free license plates in the next year. Tianjin is expected to carry on exemption on electric cars from plate lottery while Wuhan, plagued by noxious air, also needs to maintain its green vehicle policies.

The State Council released guidelines on Oct. 9 to build a nationwide charging network and is seeking to push charging infrastructure deployment to outpace electric vehicle expansion. The statement stipulates all new residential parking lots must be equipped with charging facilities, and 10 percent of public parking area must be saved for charging pole installation. By 2020, 12,000 charging stations and 4.5 mn poles are expected to be installed to meet the power demand for five million EVs at most, with 2,000 EVs supported by each charging station.

As charging infrastructure becomes easier to find, potential buyers will no longer be worried about batteries running out on the roads. In reality, setting up charging infrastructure by private enterprises is not an easy task as many existing residential communities lack enough power capacity. The State Council’s proposal addresses this by requiring power grid enterprises to take charge of installation and not charge grid connection fees. Parking lots for EVs are also too expensive, implying lower returns for charging pole owners, curbing expansion for charging poles. New requirements for car parks will resolve such issues.

Cancelling of curbs means that further green policies will be taken by local governments. Given that the Ministry of Science and Technology favors full electrical vehicles over hybrids as a long-term strategy, subsidies for EVs are higher than those for hybrids. EV sales currently take 62 percent of new energy cars sales and are expected to take a bigger portion as the market matures.

China’s technology is closing in behind its international counterparts although Tesla, the California-based carmaker established by tycoon Elon Musk, remains the global leader. Chinese EV manufacturers include BYD, whose e6 model leads domestic carmakers followed by BAIC, Geely and Brilliance. The Toyota Prius is the global leader by far in hybrids. The fully electric BYD e6, and the BYD Qin, a hybrid, are rated the best domestic products and are pretty close to the performance of global leaders such as Tesla and Toyota.

Chinese enterprises are also stepping up research and development efforts in order to seize market shares and intend eventually to overtake advanced automobile nations on the technological front. The government has provided subsidies for both electric and plug-in vehicles, but will scale back the subsidies by 20 percent in 2017-2018 and by 40 percent in 2019-2020.

There are still several bottlenecks. Standards must be unified for charging facilities, probably through the state grid, partnering with China Tower Co., which recently delivered 1.5 million telecom towers from big three operators. The massive size of the existing towers might serve as sound supplements for charging infrastructure after they are embedded with unified charging access. Further, the National Energy Administration (NEA) is studying wireless charging technology, which would allow more electric cars to charge together.

The cars are still plagued by insufficient battery capacity and long charging hours. Tesla claims its product can run 300 km on 75 minutes of charging. China’s leader BYD is only slightly behind. Bloomberg recently reported that China has subsidized several electric car start-ups, including Faraday Future, Atieva and NextEV. More partnerships, investments and even acquisition of foreign technology can be expected to speed up China’s green car transition. The upstream players include electrical battery, motor and control makers while downstream comprises EV car and bus makers and charging stations.

Victor Kwan is a China research analyst for the Hong Kong-based Reorient Securities Ltd.