The invention relates to a hybrid electric vehicle based on a hydraulic retarder and a control method thereof. A driving system comprises a driving motor, a power battery, an engine, the hydraulic retarder, a clutch, a power coupling, a transmission, a vehicle axle and the like, wherein an output shaft of the engine is connected with a movable wheel input shaft of the hydraulic retarder, and a movable wheel output shaft of the hydraulic retarder is connected with a first input shaft of the power coupling through the clutch. A corresponding heat management system consists of a heat radiator, a cooling fan, a main path water pump, a second switch valve, a first switch valve, a bypass water pump, a cooling pipeline, and a hydraulic retarder control valve, wherein the driving motor, the power battery, a cooling water jacket of the engine and a working cavity of the hydraulic retarder are respectively connected with a heat radiator in parallel.