China's domestic passenger car market could return to modest growth in 2027 after a sharper-than-expected downturn this year, as temporary pressures ease and automakers introduce more competitive models, said industry analysts.

Retail sales could rise by up to 5 percent next year, with a central forecast of 2 percent, according to an assessment released on Monday by Cui Dongshu, secretary-general of the China Passenger Car Association, citing the association's automaker forecasting team.

The team projected sales of 18.5 million vehicles this year, down about 22 percent from a peak of 23.74 million in 2025 and even below the 19.29 million recorded in 2020. A 2 percent recovery would lift sales to about 18.87 million, still roughly one-fifth below last year's level.

READ MORE: China's NEV share of new car sales hits record 61.6% in September

Recent figures underline the weakness. Retail sales dropped 21.7 percent year-on-year to 13.33 million vehicles in the first nine months, with September sales down 28 percent, CPCA data showed. The decline continued into October, with passenger car retail sales down 26 percent year-on-year in the first 18 days of the month.

Cui attributed the slump to several overlapping factors, including purchases brought forward before changes to incentives, diminishing effects from vehicle trade-in subsidies, elevated oil prices and higher costs for chips and battery materials. Sluggish consumer sentiment has added to the pressure.

Under existing tax rules, new energy vehicles moved from a full vehicle purchase tax exemption in 2025 to a 50 percent reduction in 2026 and 2027, with tax savings capped at 15,000 yuan ($2,250) per passenger vehicle.

But Cui argued that the downturn did not signal a lasting contraction in demand. "The logic of long-term steady growth remains intact," he said, predicting that easing costs, reduced inventory pressure and a stronger pipeline of new models could support a gradual recovery.

The weakness is not uniform across the industry. NEVs continued to gain ground in China's passenger car market, capturing a record 67 percent of retail sales in September. While their sales fell 16.7 percent year-on-year, the decline was far smaller than the 43 percent slump in conventional fuel vehicles, association figures showed.

The divide between domestic demand and overseas business has been equally stark. China exported 8.21 million vehicles in the first nine months, up 65.8 percent, while overall domestic automobile sales fell 22.4 percent, according to the China Association of Automobile Manufacturers.

"Despite a complex and challenging external environment, exports have continued to grow rapidly, demonstrating strong resilience," said Chen Shihua, deputy secretary-general of the association. Chen also pointed to the rising share of NEVs in new-car sales as evidence of continued structural change.

Looking ahead, Cui expects lower battery material costs, more competitive models and reduced destocking to support a recovery in 2027.

"Improving product competitiveness on the supply side is key to turning pent-up demand into actual retail sales," he noted.

ALSO READ: China sets out road map for smarter, greener vehicles

Zhang Yongwei, president of the China EV100 research institute, also expects the industry to enter a recovery phase, but sees a deeper shift in how companies compete.

Zhang described the domestic market as facing "strong supply and weak demand", noting that the top 20 percent of models accounted for 85 percent of sales, while 70 percent of models sold fewer than 1,000 vehicles a month on average.

The next stage of growth would depend less on expanding output and more on product quality, technological innovation, efficiency and overseas operations, he said, as electric vehicles and intelligent driving reshape consumer preferences.

Contact the writers at lijiaying@chinadaily.com.cn