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China's top market watchdog has issued new rules aimed at stopping a damaging price war among automakers, after passenger car sales plunged nearly 20% in January from a year earlier — the sharpest drop in almost two years.

The State Administration for Market Regulation released guidelines on Thursday targeting carmakers, dealers and parts suppliers.

The rules are designed to prevent companies from slashing prices below production costs to push rivals out of the market.

Automakers are now banned from selling vehicles at a loss to "squeeze out competitors or monopolize the market."

The regulator warned that violators could face "significant legal risks." The guidelines also crack down on deceptive pricing and price-fixing deals between manufacturers and suppliers.

The move follows weak January sales data from the China Association of Automobile Manufacturers.

The group reported that passenger car sales fell 19.5% year-on-year to 1.4 million units, down from 2.2 million in December, Independent reported. That marked the steepest percentage decline since February 2024.

Industry experts say many buyers are holding back on big purchases. Some electric vehicle tax breaks have been reduced, and trade-in subsidies in certain regions have been phased out. These changes have made consumers more cautious.

China's Auto Price War Costs Industry $68 Billion

The price war has been costly. Li Yanwei of the China Automobile Dealers Association recently estimated the industry lost 471 billion yuan, or about $68 billion, in output value over the past three years due to aggressive discounting.

According to AP News, even with the slowdown at home, Chinese automakers are expanding overseas. Passenger car exports jumped 49% in January compared with a year earlier, reaching 589,000 units.

"We don't foresee a loss in momentum for the Chinese auto industry this year," said Claire Yuan of S&P Global Ratings.

Brands such as BYD — which recently overtook Tesla as the world's top electric vehicle seller — are focusing on Europe and Latin America to offset tough competition at home. Analysts at Citi expect China's car exports to rise 19% this year, driven by electric and plug-in hybrid vehicles.

Trade policies are also shifting. Last month, Canada agreed to reduce its 100% tariff on China-made EVs.

The European Commission has granted a tariff exemption for a China-built EV model from Volkswagen under its CUPRA brand, provided it meets a minimum import price.

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China