Tesla's found a sweet spot in China — and may be planning a 6-seat Model Y

• Tesla's EV sales in China surged in August, marking its best month of the year to date.
• The boost follows a global demand slowdown and increased government rebates for EVs in China.

Things are beginning to look up for Tesla in China.

After a global demand slowdown, Tesla saw a boost in electric vehicle sales and had its best month of the year in China — its biggest market outside the US.

Tesla sold 86,697 EVs in China in August, up from 74,117 in July, data from the China Passenger Car Association released Monday showed. At its Shanghai factory, which produces the Model Y and Model 3, shipments were up by about 3% from a year ago.

Reuters reported on Tuesday that Elon Musk's company plans to start production in Shanghai for a six-seat Model Y in late 2025. The EV maker has reportedly asked suppliers to prepare for a double-digit increase in shipments.

China's government gave Tesla and domestic EV makers a boost in July by doubling a rebate for some models to about $2,800, according to a post from the trade body on WeChat.

"In August, the terminal sales of new energy vehicles showed a trend of 'not being slow in the off-season', and the consumption of new energy vehicles contributed greatly to the increase," the association said in the post, which was translated into English.

But Tesla still has its work cut out for it in China. It faces stiff competition from domestic players, prompting it to cut prices several times over the past year.

Local rival BYD sold 373,083 EVs in August, an uptick of 36% from a year earlier. Xiaomi delivered over 10,000 units, The Wall Street Journal reported, citing a post on its Weibo account.

Meanwhile, Chinese carmaker Xpeng recently launched an EV for $22,000, which is nearly half the price of Tesla's Model 3 in China.

Tesla is expected to gain approval to sell its Full Self-Driving tech in China later this year, which could drive more sales there.

Tesla didn't immediately respond to a request for comment from Business Insider, made outside normal working hours.