China’s widening gap between strong factory output and weak domestic demand is becoming increasingly pronounced in the automotive sector, where exports are offsetting slowing sales at home.

The country’s domestic car sales fell 21% in the first half of the year, while exports jumped 65.3%, according to data published on July 9 by the China Association of Automobile Manufacturers (CAAM).

HSBC lowered its forecast for China’s full-year passenger car demand growth from flat growth to a 5% decline, citing the end of some electric vehicle subsidies and collapsing demand for gasoline-powered cars as high oil prices accelerate the shift to electric vehicles.

“With domestic demand still subdued, exports remain an important support for utilization, earnings resilience and mix improvement,” HSBC analysts said.

All-electric and plug-in hybrid vehicles accounted for a record 46% of China’s car exports in the January-June period, up 12 percentage points from a year earlier.

China “precisely meets the global market’s strong demand for energy-efficient vehicles amid fluctuating gasoline prices,” said Cui Dongshu, secretary general of the China Passenger Car Association.

Brazil, Australia, the UK, Italy, and Thailand accounted for the biggest increases in China’s EVs exports in the first five months, with Brazil leading the growth.

Chinese automakers are increasingly relying on overseas markets. Chery and Great Wall Motor have recently generated more than half of their sales from exports, while BYD, Geely, and Xpeng have raised their overseas sales targets for 2026 by 15%, 17% and 11%, respectively.

Chery, China’s largest automotive exporter, shipped 940,000 vehicles overseas in the first six months of the year, nearly 70% of its total sales, driven by demand in the Middle East, Latin America, and Europe. It aims to export more than 1.5 million vehicles in 2026.

DFSK, a minivan maker owned by Chongqing-based Seres Group, is shifting its focus to exporting higher-end SUVs to Southeast Asia and Latin America.

“We have made overseas markets a clear strategic priority,” DFSK president Amy Gong told Nikkei Asia.

The company unveiled a six-seat hybrid SUV at the Hong Kong automotive show last month and plans to enter Indonesia and Argentina. Gong said tariffs mean its vehicles are priced at 1.5 to 2 times their domestic prices in overseas markets, targeting mid- to high-end consumers.

The export boom has coincided with rising trade barriers.

The European Commission announced additional import tariffs on Chinese EVs on July 4, 2024, after their manufacturers were deemed to have unfairly benefited from China’s state subsidies.

Turkey suspended import tax exemptions for BYD last month and warned the company it could face repayments if it fails to fulfil a USD 1 billion commitment to begin local operations.

Southeast Asian markets are also becoming more restrictive. After tariff exemptions expired in countries including Thailand, Indonesia, and Malaysia at the end of 2025, governments increasingly required local assembly instead of direct imports.

Mexico also slapped a 50% tariff on Chinese EVs at the beginning of this year and has indefinitely paused plans that would allow BYD to build a factory there.

The CAAM cautioned that a “conservatively optimistic” attitude should be taken toward the export outlook for the second half of the year.

“The external environment is complex and volatile,” Chen Shihua, CAAM’s deputy secretary general told reporters. “We need to closely monitor the international climate and steadily expand into global markets.”

This article first appeared on Nikkei Asia. It has been republished here as part of 36Kr’s ongoing partnership with Nikkei.