While the recent surge seen in the Chinese electric vehicle (EV) market in the fourth quarter of 2015 was impressive, there's more to the story, according to Lux Research.

Lux found that China sold an astonishing 120,000 plug-in vehicles in the fourth quarter and usurped the U.S. as the plug-in sales leader. China also quadrupled the U.S.'s volume of units sold.

But, the firm has warned that there is significant risk of the industry over-hyping the Chinese market. Lux said the country remains heavily policy-driven, which is expensive and unsustainable. As plug-in vehicle sales increase, subsidies become increasingly expensive for governments, and must eventually be phased out.

The firm noted that the aforementioned generous subsidies have invited fraud in plug-in vehicles, where some companies try to abuse policy for monetary gains.

Lux: China's EVs Can't Compete On World Stage

"China's vehicles are typically domestic-only offerings, and cannot compete on the world stage, for now," Lux Research said.

In addition, the battery pack size is much smaller in China than in other markets like the U.S. The research firm said the average pack size in plug-ins sold on the U.S. market was 53 kWh per vehicle, helped by the popularity of the Model S and new Model X from Tesla Motors Inc (NASDAQ: TSLA). However, Chinese EVs use much fewer batteries – on average, just 19 kWh per average plug-in sold.

Despite these drawbacks, Lux noted China is likely to remain a major market in EV sales, but clients should take note of the above facts while drawing business plans.

"Over time, the country's market will transition away from policy-driven demand, and reporting of true vehicle sales will become more accurate. Until then, opportunities in China will carry a relatively high risk compared to other geographies," the blog post concluded.

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