China steps up price war checks as cars keep getting cheaper

China’s new restrictions on car discounts signal the government is cranking up its scrutiny of excessive competition in the local auto industry after previous attempts failed to stem falling vehicle prices.

State administration for market regulation announced proposed guidelines late Friday, including measures that would prevent manufacturers from pricing cars below the cost of production, and to stop dealers from offering discounts or rebates that would effectively bring down vehicle prices below cost.

Shares of BYD and other Chinese makers of electric vehicles, who’ve been relying on discounts to prop up slowing demand, fell on Monday as the move signaled further scrutiny on the industry. Despite China publicly shaming automakers more than six months ago for their “rat-race competition” and warning about the financial health of the industry, prices have continued to drop.It remains to be seen if the new rules will reverse the downturn in car prices, considering one of the biggest causes of the vicious discounting comes from weak demand and car production overcapacity, said Li Yanwei, an adviser to the China Automobile Dealers Association. “Some brands have used economies of scale in their capacity to gain an advantage in the market at this stage, exacerbating the price war,” he said. More broadly, China’s clampdown on car prices is part of the government’s crackdown on “involution,” whereby hyper-competition brings diminishing returns.

Meanwhile, average car transaction prices have fallen, with BYD’s slipping from 116,200 yuan ($16,480) in June to 108,100 yuan in October, according to data compiled by China Auto Market.