What happened

After a torrid run the previous day, electric vehicle (EV) stock Nio (NYSE: NIO) lost momentum the last day of 2021 and was down about 1.1% as of 12:50 a.m. ET. A major development in China is to blame for Nio shares ending Dec. 31 on a muted note.

So what

This morning, China's Finance Ministry announced a steep cut in and eventual scrapping of subsidies it currently offers to buyers of new energy vehicles (NEV). The Ministry said NEV subsidies will be cut by 30% in 2022 and then stopped altogether after Dec. 31, 2022.

Image source: Nio.

Why Nio Stock Dropped the Last Day of 2021 Edit My Quotes

China is the world's largest market for NEVs, which include all-electric as well as plug-in and hybrid electric vehicles. While subsidies initially fueled China's NEV boom, production and sales are on such a solid growth trajectory now that the nation believes it doesn't need to subsidize purchases anymore. For example, NEV sales in China hit a record in the month of November and accounted for nearly 21% of total passenger car sales during the month. China's NEV sales are expected to be around 3.3 million in 2021 and surge to 5 million units in 2022, according to S&P Global Platts.

So far, subsidies have been one of the biggest competitive advantages for local Chinese EV manufacturers like Nio over foreign rivals such as Tesla (NASDAQ: TSLA). Importantly for Nio, this comes at a time when it's launching the ET5, a Tesla Model 3-competing mid-size sedan that it plans to start delivering in late 2022. A subsidy may have helped boost ET5 sales at a time when demand for Tesla's cars is booming in China. For perspective, demand is so strong that Tesla has just raised the prices of both the models it sells in China, Model 3 and Model Y, for the second time within a matter of weeks.

Now what

While it's true that the scrapping of subsidies will mean greater competition for Chinese EV makers like Nio, the move doesn't really come as a surprise as the Chinese government had cut subsidies for 2021 as well and had hinted of a phase-out. Moreover, the subsidies were primarily available for lower-priced cars, so that shouldn't hurt Nio much. What matters is what Nio is doing to beat competition. For now, Nio's plans for 2022 look hugely promising, and that's what investors should focus on as we step into the new year.

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Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool owns and recommends NIO Inc. and Tesla. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.