BEIJING/SHANGHAI (Reuters) -China's auto industry has inflated car sales for years through a burgeoning government-backed grey market that registers new cars right off the assembly line and then ships them overseas as "used" vehicles.

These so-called "zero-mileage" cars have never been driven but they are being exported as used to markets like Russia, Central Asia and the Middle East, allowing Chinese automakers to show growth and to dispose of cars that it would be difficult to sell domestically, according to a Reuters review of government documents and interviews with five auto dealers and car traders. 

"This is the outcome of an almost-four-year price war that has made companies desperate to book any sales possible," said Tu Le, Michigan-based founder of consultancy Sino Auto Insights. 

The practice only gained national attention after the boss of Chinese automaker Great Wall Motor criticized the sale of zero-mileage used cars within China in May. On June 10 the People's Daily newspaper condemned the sale of zero-mileage used cars domestically.  

The paper, which often signals the positions of China's top Communist Party leaders, blamed these fake used cars for driving down prices amid a withering domestic price war and called for "tough regulatory action" to restore order. 

But the export and sale of fake used cars is actively encouraged by regional governments in China, according to a Reuters review of state media reports and government documents.  

Local governments have embraced the practice as vital to meeting ambitious targets for economic growth set by Beijing, according to a Reuters review of local policy documents and state media articles. 

Reuters has identified 20 local governments in China - including major export hubs like Guangdong and Sichuan - that have described their support for the export of zero-mileage used cars in publicly available government documents. 

The tactics include creating extra licenses for the export of zero-mileage used cars, fast-tracking tax rebate claims, investing in export infrastructure, and funding networking events to encourage zero-mileage used-car exports, the government documents showed. 

The zero-mileage used car export market works like this: as a fresh car emerges from the assembly line, an exporter buys the car either directly from the automaker or from a dealer, registers it with a Chinese license plate, and then immediately marks it as a second-hand car for shipping abroad. Along the way, the automaker books the car as sold and logs the revenue. 

The support for the practice from local governments would make little sense anywhere outside China's centrally planned economy. But here, showing rapid growth in sales and employment can bring about promotion or unlock new funding while missing economic targets that trickle down from Beijing can lead to demotions of local officials.  

Because these export firms both purchase and sell a single car, the transaction value is double that of new or used-car purchases, so local governments court them to set up shop on their turf to quickly and artificially boost their GDP statistics, two Chinese auto industry executives said.

The tactic is only one sign that China's car industry – the world's largest – is allowing production to outpace demand, driving a protracted domestic price war and spurring accusations of automotive "dumping" abroad. 

Cui Dongshu, the secretary general of the China Passenger Car Association, praised the practice earlier this month during an online panel discussion hosted by Tencent’s news portal, saying it was an alternative channel for automakers in China to access certain markets overseas that they may not be able to access due to rising trade barriers globally.

He added that it also helped to satisfy overseas demand for China-made cars in countries where Chinese brands had yet to enter.

Reuters contacted all the local governments mentioned in this article for comment but none responded. China's State Council and commerce ministry did not respond to a request for comment. China's foreign ministry referred queries on the practice to "the department in charge," without elaborating.

GOVERNMENT SUPPORT 

Local government support has taken various forms, from simplifying paperwork, to allocating extra quotas for local vehicle registrations, to setting up free warehouses for zero-mileage used cars close to China's land and maritime borders, the Chinese documents showed.  

In February 2024, the planning commission of the southern city of Shenzhen, one of China's richest cities and a tech hub that is home to Huawei and Tencent, pledged to expand the export of zero-mileage used cars as part of efforts to reach an annual target to export 400,000 vehicles of all kinds. 

Nearby, the southern Chinese metropolis Guangzhou announced earlier this year it had created a mechanism to support and accelerate the export of zero-mileage gasoline vehicles by allocating extra quotas for local registrations that are otherwise capped to mitigate traffic congestion and air pollution in the city. 

Xinmi, a district of Zhengzhou, the provincial capital of China's third-most populous province of Henan, said in February that it helped local firm Xinjiasheng Supply Chain Management Co., Ltd to "promote zero-mileage used car exports, in order to use exports to drive domestic sales."  

Reuters found a dozen local governments were boosting the export of zero-mileage used cars as part of their strategy or core to their plans for growth. 

Sichuan province, one of China's most important economic engines, said in October in a policy document it had supported the creation of an "online export ecosystem for zero-mileage used NEVs" by promoting e-commerce platforms like Alibaba International, where 100 Sichuan-based used-car sellers are now active.  

Xinjiasheng Supply Chain Management and Alibaba did not respond to requests for comment. 

MARKET SHIFTS

The practice began sometime after 2019 when China allowed used cars to be exported to other countries. Now thousands of traders are involved in passing off new cars as used to qualify for the channel, according to Wang Meng, a consultant for the China Automobile Dealers Association. 

Of the 436,000 used passenger and commercial vehicles exported by China in 2024, 90% are estimated to be "zero-mileage," Wang said.  

China overtook Japan to become the world's largest exporter of new cars in 2023 and exported 6.41 million vehicles last year, according to the China Passenger Car Association. Of these, about 6% would have actually been zero-mileage used cars, according to Wang's estimates. 

Two dealers and two industry experts said the majority of zero-mileage used cars are gasoline powered and thus less desirable in the Chinese market. But electric vehicles, which are subject to generous government-funded purchase subsidies, also make up a significant portion. 

Huanyu Auto, a used-car seller in China's west metropolis of Chongqing, expanded to the zero-mileage used-car business in 2022.  

The returns were so good in 2022 and 2023 that they were able to earn 10,000 yuan ($1,400) in profit off an electric sedan that they had purchased in China for 40,000 yuan by selling it in Central Asia, said William Ng, director of the firm's international market division. 

Criticism has started to mount. On June 7, Zhu Huarong, chairman of Chinese automaker Changan called for a crackdown on exports of zero-mileage used cars at a Chinese auto conference, saying the practice could "enormously damage Chinese brands' image" abroad. Changan did not respond to a request for further comment. 

Xing Lei, the Massachusetts-based founder of consultancy AutoXing which provides insights on Chinese EV companies to foreign investors, said the practice could cause foreign investors to assess Chinese automakers' sales skeptically. 

"How many are real or inflated? No one knows," he said.

'DUMPING' CONCERNS 

The proliferation of new cars being shipped for sale with "used" tags is reinforcing fears that China is dumping subsidized vehicles overseas, at a time when Beijing is scrambling to find export markets outside the United States, now heavily protected by tariffs. 

Some countries, concerned that the influx of cars will crowd out local dealers and confuse consumers, are starting to push back. 

"We're definitely seeing friction and tension in markets where there are already manufacturers on the ground there," said Michael Dunne, a consultant who closely follows the China auto industry.  

Russia in 2023 issued a government decree effectively banning zero-mileage used cars from brands that already had official distributors in the country. The commerce bureau of Heihe, a Chinese city that sits on the China-Russia border, said last November on its website that this applied to Chinese brands such as Chery, Changan, and Geely.  

Geely declined to comment while Chery and Changan did not respond to requests for comment.  

Other countries' market regulators, including Jordan, are finetuning their definition of used cars by mandating a longer period after a vehicle's licensing or production before it is classified as used.  

Ng, of Huanyu Auto, said growing competition from new entrants such as mom-and-pop stores and even TikTokers selling zero-mileage used cars was causing the trade to become less lucrative. 

"They used to sell vases, wine and are now selling cars in the same way," he said of the new entrants. "This is chaos." 

(Reporting by Beijing and Shanghai newsrooms; Additional reporting by Gleb Stolyarov in Tbilisi; Editing by Mike Colias and Michael Learmonth)