China has asked automakers to strengthen data protection and store locally generated data inside the country, a move which analysts said is essential to the sector's healthy development as vehicles become increasingly digitalized.

"Personal information and other important data collected and generated within the People's Republic of China should be stored locally," the Ministry of Industry and Information Technology said in a guideline released on Thursday.

"Data must pass safety appraisals before it can be exported," it said.

This is the latest step in China's efforts to deal with challenges arising from the fast-developing smart vehicle sector.

Statistics from the ministry show 15 percent of passenger cars sold last year have Level 2 autonomous functions. That means more than 3 million vehicles, from both Chinese and foreign carmakers, equipped with cameras and radars hit Chinese roads last year.

The number of smart vehicles is expected to continue to grow at a faster pace, as the global auto industry is shifting toward electrification and digitalization. Features like wireless software updates, voice commands and facial recognition are now standard on most new vehicles.

He Xiaopeng, CEO of Chinese electric car startup Xpeng, expects the proportion of smart vehicles to surge from around 2023 as electric cars gain in popularity.

Earlier this year, the National Information Security Standardization Technical Committee released a draft rule to seek public feedback, which would forbid companies from processing data from cars not related to vehicle management or driving safety.

Data regarding locations, roads, buildings and other information collected by cars through sensors such as cameras and radar will not be allowed to leave the country, it said.

Chen Quanshi, a professor of automotive engineering at Tsinghua University in Beijing, said it is a correct move to regulate the smart vehicle segment.

"Digitalization and connectivity are making cars easier to use, but they pose risks as well. We should have introduced regulations earlier," Chen said.

Cui Dongshu, secretary-general of the China Passenger Car Association, said such regulatory moves will make consumers more confident in smart vehicles.

The control of data use, transmission and storage is a challenge for the industry and regulators worldwide.

In an interview earlier this year, Nio's founder and CEO William Li said the company's vehicles sold overseas will have their data stored locally. The Chinese company's vehicles are to be available in Norway later this year and in other European countries in years following.

"The General Data Protection Regulation, a law on privacy and data protection in the EU and the European Economic Area, has very detailed and strict rules and we will meet the requirements," Li said.

Electric carmaker Tesla said in May that it has established a data center in China to store data generated in China locally. It said more such centers will be built in the future. Another United States carmaker, Ford, said it had set up a data center in China in early 2020.

In its guideline published on Thursday, the Ministry of Industry and Information Technology also released detailed rules about carmakers updating their vehicles online.

Among others, carmakers should have the ability to assess the updates' effect on vehicle safety and ensure the vehicles are safe when they are updated.

They are instructed to inform vehicle owners of details including the updates' goals, the time needed, things to watch out for, and whether the updates are complete.

A lawsuit filed in 2019 claims Tesla cut the usable battery capacity of more than 1,700 vehicles by 17 percent in the United States through online updates. The carmaker has agreed to pay up to $1.5 million to settle the claims, according to Reuters.