In Hefei, an industrial hub in the heart of central China, state-of-the-art factories produce electric cars and solar panels. Wide avenues connect office towers and landscape parks. The subway lines are opening at a rapid pace.
But at Hefei's 10-block building materials market, local traders are grim. Wu Junlin, a door salesman, has closed two of his three stores and laid off all but one of his dozen employees.
“I've been doing this for 20 years – after all these years, this year is the worst,” he said as he sat in his last store with no customers in sight.
Nowhere are the opportunities and vulnerabilities of the Chinese economy better presented than in Hefei.
Government-led growth in industries such as electric vehicles and solar panels has made China the world's export superpower and made Hefei a role model for other Chinese cities. But a nationwide real estate decline has devastated the finances of millions of families and small businesses – including in Hefei.
Hefei and surrounding cities have become a hub for electric vehicle manufacturing. Total automobile production has nearly tripled since 2019 and now exceeds that of Michigan. Hefei's industrial policy has been so successful in promoting technology manufacturers that the country's central government has adopted principles of the so-called Hefei model.
So many cities are now subsidizing electric vehicle factories that the industry is facing significant overcapacity and steep losses.
“Some communities and companies are still blindly launching and duplicating new energy vehicle projects – these require our close attention, and effective measures should be taken to solve them,” Xin Guobin, vice minister in China's Ministry of Industry and Information Technology, told a press conference last week.
The Hefei model involves using government funds to buy newly issued shares from manufacturers and startups that need cash. Officials are also arranging loans with attractive interest rates from state-controlled banks to finance new factories.
Over two decades, Hefei has been transformed by the city government's bets on companies such as BOE Technology Group, a maker of flat-panel displays, and Nio, an electric car maker. When Nio was almost out of cash in 2020, the Hefei government invested $1 billion for a 24 percent stake and state-controlled lenders pumped in another $1.6 billion.
As a provincial capital in a previously impoverished agricultural area, Hefei has leapt up the income rankings of Chinese cities. Local government cadres, city economists and institutional investors visit Hefei to study its methods.
Hefei has an $86 billion municipal holding company that invests money in struggling but technologically advanced companies. The holding company, the fourth-largest of its kind in China, buys company shares cheaply when few other investors want them.
These companies sometimes recover, as BOE Technology and Nio did after Hefei's investments. The city then offers incentives for those companies' suppliers and customers to also move to Hefei, said Li Bo, assistant professor at Peking University's Guanghua School of Management.
“Hefei has a clear understanding of local industries – the state-run investment fund is tailored to the needs of companies,” she said.
Hefei is at the forefront of several industrial supply chains. A fifth of the world's liquid crystal displays for consumer electronics are manufactured in Hefei. This also applies to many laptops and notebooks from Lenovo. Hefei produces a tenth of China's household appliances. The city government has allocated $2 billion of the $2.5 billion needed to build China's first factories for an advanced type of computer memory chips.
Electric car production in Hefei quadrupled last year, and that figure will rise even further this year as Volkswagen ramps up production at a massive new factory. An electric car battery maker partly owned by VW, Gotion High-tech Company, has also built a factory in Hefei.
Other Chinese automakers are following suit. BYD, which competes with Tesla to become the world's largest electric car maker, has nearly completed a $5.6 billion factory complex with a planned capacity of 1.3 million cars a year.
Hefei owes much of its success to a world-class engineering university, much as Carnegie Mellon University fueled Pittsburgh's engineering renaissance. Most of China's best universities are located in Beijing or Shanghai. But during the turmoil of Mao's Cultural Revolution, officials at the University of Science and Technology of China moved the institution from Beijing to Beijing, and it ended up in relatively quiet Hefei in 1970.
In 2005, Sun Jinlong, a new city leader in Hefei, spearheaded the city's focus on engineering manufacturing. BOE Technology was primarily based in Beijing at the time, but was experiencing financial problems. The city persuaded the company to build factories in Hefei and offered more than $1 billion in investments and loans.
Subsequent company statements show that BOE Technology received an additional $250 million in direct subsidies from the city from 2011 to 2016. BOE Technology is now one of the world's largest manufacturers of flat panel displays.
Hefei had a powerful ally in driving its success. Li Keqiang, China's second-highest official and premier until his retirement almost a year ago, grew up in Hefei.
During a trip to the city in 2015, Mr. Li promoted his “Made in China 2025” plan. This plan called for replacing many imported advanced industrial goods with Chinese production by 2025, using industrial policies similar to those of Hefei. Mr. Li died in October.
Hefei still faces challenges. Automakers have found it difficult to convince executives and engineers to leave the glamor of Shanghai or Beijing for a quieter life in Hefei, despite the low cost of living. BOE Technology has retained its headquarters in Beijing.
But Hefei's biggest problem lies in housing.
Until China's real estate crisis reached Hefei two years ago, construction and real estate development in the city was slightly larger than manufacturing. Homes, office towers and hotels tower over small farms that date back to the city's recent agricultural past.
This reliance on construction is now hurting Hefei.
According to China Index Academy, a real estate market data provider, the number of new apartments sold each month in Hefei has fallen sharply. Through November, sales were down 45 percent compared to the previous year.
The slump in sales is weakening the ability of indebted real estate developers to finance new projects. The total area of new projects fell by 57 percent last year compared to 2022.
As developers run out of money, they are buying fewer land leases from the government. Sales of these leases, the cornerstone of local government budgets in China, typically cover half of Hefei's municipal spending. Last year, rental sales in Hefei fell 38 percent, threatening government programs.
Small businesses say the local government, previously a big customer, has stopped placing orders.
“The government is out of money – it's completely drained,” said Tao Yingcheng, the owner of a flooring company in Hefei.
Some local workers also complain that they lack the skills to compete for jobs. Companies like Nio and Volkswagen are increasingly relying on robots and other automation tools and hiring graduates from top universities elsewhere.
“The current employment environment is not very good,” said Xu Mingyi, a Hefei resident who studied computer programming and still hasn't found a job in his field. Instead, he works as a hail driver. “These companies in Hefei need so much talent that ordinary people can hardly meet the demands.”
Li You contributed to the research.
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