BEIJING (Reuters) -China's car sales inched up 1.3% in the first two months of 2025 from the same period a year earlier, as an expanded customer subsidy programme spurred auto demand while a new smart electric vehicle price war unfolds.

Passenger vehicle sales rose 26.1% year-on-year to 1.41 million units in February, following a 12% fall in January, data from the China Passenger Car Association (CPCA) showed on Monday.

The timing of the Lunar New Year celebrations, the country's largest annual holiday, which fell in late January compared with February last year, disrupted production and consumption activities.

The consumer goods trade-in scheme has covered more than 1 million vehicles so far this year, Commerce Minister Wang Wentao said last week on the sidelines of the annual parliamentary session.

The subsidy program at both central and local government levels is expected to benefit 15 million cars this year, said Cui Dongshu, secretary-general at CPCA.

The subsidised auto trade-ins topped 6.8 million vehicles last year, with over 60% of participants opting to trade old cars for EVs and plug-in hybrids, known collectively as new energy vehicles.

EV and plug-in hybrid sales grew 79.7% to make up 48.8% of overall car sales last month, failing to outsell gasoline cars for the third consecutive month.

Elevating a three-year-old price war in the world's largest auto market to a new level, BYD equipped its best-selling Ocean and Dynasty lineup with advanced driving-assistance systems without extra charge in February.

The move prompted rivals including Geely and Stellantis ( STLA )-backed Leapmotor to follow suit with affordable smart EVs. Toyota ( TM ), whose market share in China slid further to 6.7% in 2024 from 8% in 2023, began selling a $20,000 smart electric car in China last week, aiming to attract buyers with its advanced features similar to Chinese rivals.

Leapmotor is due to launch pre-sales of its electric SUV B10 later on Monday, its first model priced under 150,000 yuan ($20,671.12) featuring lidar and urban navigation capabilities.

Xiaomi ( XIACF ), the world's third-largest smartphone vendor which launched its first EV one year ago, is already shaking up the market. It sold 23,728 vehicles last month, while Tesla's EV sales in the hyper-competitive market fell to 26,777 unit, the lowest level since November 2022.

To increase the appeal of its aging models, Tesla made a long-awaited update to its autopilot software in China to enable city navigation in late February.

The U.S. automaker exported 3,911 China-made EVs last month, down 87.1% from a year earlier.

Overall car exports increased 11% in February, quickening from a 3% rise in January.

($1 = 7.2565 Chinese yuan renminbi)