The Chinese government plans to significantly cut subsidies for new energy vehicles this year and phase them out altogether by 2020, according to local reports quoting government officials.

The administration since 2010 has provided generous sales incentives for alternative fuel vehicles, or new energy vehicles, as it looked to tackle the growing problem of urban air pollution.

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Sales of these vehicles, comprising mostly electric and hybrid vehicles, increased by over 53% to a record 777,000 units last year.

A formal announcement of the withdrawal of the subsidies is expected to be made soon as government looks to weed out from the sector uncompetitive low tech companies with limited prospects which it sees as already having taken up valuable public funds.

Reports in the government controlled China Daily newspaper, quoting the vice president of the China Automotive Technology & Research Centre Wu Zhixin, suggested the cuts were due to be announced at the end of 2017 but were delayed due to political reasons.

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A final draft policy has now been agreed between the Ministry of Finance and the Ministry of Industry and Information Technology and has already been submitted for final approval.

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An initial round of cuts is expected to come into effective in the second quarter of 2018. 

A report in the Economic Observer at the end of last year suggested electric vehicles with a range of less than 150km would no longer be eligible for a CNY20,000 (US$3,125) government subsidy.

Wu expects the cuts will have an immediate impact on low tech, uncompetitive regional producers while leading manufacturers have the resources to succeed.