China is studying the extension of its policy on the purchase tax exemption for NEVs, a State Council meeting said yesterday.

Shares of China's electric vehicle (EV) trio traded in Hong Kong surged in early trading Thursday as a high-level government meeting on Wednesday revealed signals that made investors more optimistic about the new energy vehicle (NEV) chain.

Nio (NYSE: NIO, HKG: 9866, SGX: Nio) rose 7.29 percent to HK$188.3 in Hong Kong by the close of morning trading, continuing to hit a new high since April 4. The stock has accumulated an 86 percent gain since May 13.

Xpeng Motors (NYSE: XPEV, HKG: 9868) rose 9.94 percent to HK$127.2, hitting a new high since March 3.

Li Auto (NASDAQ: LI, HKG: 2015) rose 9.87 percent to HK$154.8, continuing to hit a new high since its Hong Kong IPO in August last year.

BYD (SHE: 002594, HKG: 1211, OTCMKTS: BYDDY) rose 4.86 percent to HK$311 in Hong Kong.

The NEV industry chain in China's A-share market was generally higher, with an ETF tracking the sector up 2.35 percent by the end of morning trading at 11:30 a.m. Contemporary Amperex Technology Co Ltd (CATL, SHE: 300750) was up 2.57 percent and Gotion High-tech was up 3.29 percent.

The widespread gains may be attributed to a boost in investor sentiment due to support for the NEV industry expressed at a high-level Chinese government meeting yesterday.

Chinese Premier Li Keqiang hosted an executive meeting of the State Council on June 22, saying the country would support NEV consumption, according to a CCTV report Wednesday night.

Taking into account the current reality, China will study the extension of the policy on the exemption of purchase tax for NEVs, the meeting mentioned, according to the report.

This is the strongest signal from the government about the possible further extension of the purchase tax exemption policy for NEVs.

CSC Financial said in a research note today that NEV sales are expected to continue to grow if the purchase tax exemption continues to be extended, which is good for the entire NEV industry chain.

To support the development of energy-efficient vehicles, China first began exempting NEVs from purchase taxes in 2014, allowing most consumers who buy such vehicles to save about 10,000 yuan ($1,580) relative to those who buy traditional fuel vehicles.

Vehicles eligible for the policy include pure electric vehicles, plug-in hybrids, and fuel cell vehicles.

The policy originally expired at the end of 2017, but was extended until the end of 2020 before it expired, and in March 2020, China renewed the policy until the end of 2022.

Over the past year, Chinese officials have signaled several times that the policy may be extended.

Wan Gang, Vice Chairman of the National Committee of the Chinese People's Political Consultative Conference (CPPCC) and President of the China Association for Science and Technology, said on June 18 of last year that he suggested that China should accelerate its research on the development of a post-subsidy support policy and extend the purchase tax exemption for NEVs.

On January 18 of this year, Xiao Yaqing, minister of industry and information technology, said that China needs to study and clarify support policies including the continuation of the purchase tax concession for NEVs as early as possible, improve the point management requirements, and stabilize market expectations.

In response to the severe impact of Covid on the auto industry chain, China announced in late May a policy to support the auto industry by reducing by half the vehicle purchase tax on passenger vehicles of 2.0-liter displacement and below with a purchase date between June 1 and December 31 and a price not exceeding 300,000 yuan ($45,060).

Prior to the policy, China's purchase tax rate for internal combustion engine (ICE) vehicles was 10 percent, while the purchase of NEVs was exempt from purchase tax.

Given China's tremendous support for the NEV industry, there is even less reason to reinstate the purchase tax on NEVs next year when the purchase tax on regular ICE vehicles has been cut in half this year.

For the auto industry as a whole, the most uncertainty may be whether the policy of halving the purchase tax on ICE vehicles will continue next year.