China has banned Tesla vehicles from entering military compounds and is restricting their use by military staff and employees of certain state-owned businesses over national security concerns.

Unnamed sources told the Wall Street Journal Chinese officials have taken issue with the large amounts of data gathered by Tesla's semi-autonomous cars via internal and external sensors and cameras.

Specifically, they are concerned Tesla vehicles can constantly transmit images of their surrounds along with location data and details about drivers' mobile phone contacts when their phone is synced to the on-board user interface.

Tesla denied the claims, saying its privacy policy "complies with Chinese laws and regulations".

"Tesla attaches great importance to the protection of users’ privacy,” the company said.

Autopilot, the name of Tesla's semi-autonomous driving feature, is powered by eight external cameras, radar, and a short-range ultrasonic sensor monitoring the car's surroundings.

Speaking at the Chinese Development Forum on the weekend, Tesla CEO Elon Musk reiterated his company's statement on the issue of privacy.

"There’s a very strong incentive for us to be very confidential with any information,” he said.

“If Tesla used cars to spy in China or anywhere, we will get shut down.”

China is one of the world's biggest market for electric vehicles, making up 41 per cent of global sales in 2020, second only to Europe.

Naturally, it is therefore a crucial market for Tesla which last year made 21 per cent of its US$31 billion in revenue from China.

Earlier this year, the Hong Guang Mini EV made by Wuling Motors became the most popular electric vehicle in the world, beating the Tesla Model 3 for top spot.

A joint effort between two Chinese motor companies and US General Motors, the small electric car retails for around $5,700 and had 36,000 sales in China in January compared with 21,500 Model 3s, according to The Verge.

Even as one of the largest purchasers of electric vehicles, electric car sales only make up 6.3 per cent of total small car sales in China last year.

Out of one million cars sold in Australia last year, just under 7,000 were electric vehicles.

Pressure on Tesla over national security concerns mirror issues the US government had with Chinese-owned social media firms TikTok and WeChat during an ongoing trade dispute during the Trump presidency.

The Australian government has also issued specific bans to chinese telecommunications company Huawei, restricting the use of its equipment for the NBN and 5G rollouts.