Imagine a massive growing middle class buying gas-powered foreign produced cars instead. What would that do the Chinese economy and security with all oil imported?
The strategy of welcoming of firms such as Tesla builds up a huge ecosystem of suppliers creating possibilities for China's own car companies. Whether they target a highend international market such as with the Volvo Polestar or the small electric car market.
The small car market basically doesn't exist in the west. We don't find these cars safe or desireble enough. But safety and desirability of this category of cars will improve rapidly over time and ultimately they will become attractive enough to be sold in the west.