China is the world's biggest market for cars, and the most competitive in the electric vehicle sector, with more than 100 homegrown companies racing to make the clean car of the future.
But an economic slowdown has weighed on consumer spending and fuelled a price war between manufacturers, denting their profitability.
To boost demand, Beijing is offering the subsidy to drivers who trade in an electric or hybrid vehicle registered before 2018, or a gasoline-powered car that doesn't meet certain national emissions standards.
Those who replace a vehicle purchased after 2018 will be eligible for a subsidy of 7,000 yuan ($960), the commerce ministry said in a statement Friday.
The measure, in force until the end of the year, applies to all purchases of new electric or hybrid vehicles.
Its announcement coincides with the China Auto Show, where Chinese brands are stealing the show from foreign manufacturers struggling to make the transition to electric vehicles.
The decision also comes as Chinese automakers face heightened scrutiny in many Western countries.
Pressed by France, which is home to several historic carmakers, the European Commission has launched an investigation of Chinese state subsidies for the EV sector and threatened to apply customs surcharges to protect the European market.
The United States generally opposes subsidies that it thinks will lead to production "overcapacity" and harm global competition.
Washington is also concerned about potential national security risks posed by Chinese vehicles.
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