China suspended customs clearance for the Tesla Model 3, citing various irregularities, including improper labeling of the vehicles, financial publication Caixin reported, according to Reuters.
The news agency said Tesla shares fell nearly 2% in trading before the bell, adding to a 10% decline since Friday as investors worried about frictions with the Chinese government.
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"Selling into China has clear hurdles and this is a reminder of the pitfalls when betting on growth in the region," Wedbush Securities analyst Daniel Ives told Reuters.
"The hope is this issue can be smoothed out quickly otherwise it becomes more of a black eye for Tesla and agita for investors."
The report noted chief executive officer Elon Musk had played up the support Tesla was getting from Chinese authorities as it invests in the country's first wholly foreign-owned car plant in Shanghai, due to come online later this year.
Until then, Tesla has to import US-made cars and pay substantial customs duties, putting it at a disadvantage against locally-made, government-subsidised electric vehicles from rivals such as Nio, Byton and XPeng Motors.
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By GlobalDataCaixin said the Shanghai customs authority told Tesla in an official notification on 1 March it should not sell or use Model 3 vehicles that had already been cleared.
The authority had also urged inspectors at all ports responsible for importing vehicles to step up inspections of other imported Tesla models and suspend their release if similar problems were uncovered, the report added.
Citing the official state news agency Xinhua, 1,171 Model 3 sedans arrived at north China's Tianjin Port, after 84 units were imported via the port in February.
Local media reports said the first shipment of Model 3 cars arrived in Shanghai on 22 February while deliveries started at the end of the month.
Tesla's Shanghai factory, built with funds from local banks at low interest rates, plans to start making Model 3s at the end of this year and eventually produce cars at a rate of 10,000 per week, Reuters said.
