What China’s EV city Hefei says about the state of the economy

What China's EV city Hefei says about the state of the economy

State-of-the-art factories in Hefei, an industrial hub in the heart of central China, produce electric cars and solar panels. Wide avenues connect office towers and landscaped parks. Subway lines open at a faster pace.

Yet at Hefei’s market for construction materials, which fills 10 city blocks, local traders are sad. Door salesman Wu Junlin 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, sitting in his last store with no customers in sight.

Nowhere are the opportunities and weaknesses of China’s economy better illustrated than in Hefei.

Government-directed growth in industries such as electric vehicles and solar panels has turned China into the world’s export superpower, making Hefei a model for other Chinese cities. But a nationwide downturn in real estate has devastated the financial situation of millions of households and small businesses, including in Hefei.

Hefei and surrounding cities have become EV manufacturing hubs, with total car production nearly tripling since 2019 and now exceeding that of Michigan. Hefei’s industrial policies have been so successful in promoting technology manufacturers that the country’s central government has adopted the principles of the Hefei model.

Now so many cities are subsidizing electric vehicle factories that the industry is facing overcapacity and huge losses.

Xin Guobin, vice minister of China’s Ministry of Industry and Information Technology, said, “Some localities and enterprises are still blindly launching and duplicating new energy vehicle projects – these are things we need to pay great attention to, and solve them.” Effective measures should be taken to do so.” said at a news briefing Last week.

The Hefei model involves using government money to buy newly issued shares in manufacturers and start-ups that need cash. Officials also arrange loans from state-controlled banks at attractive interest rates to finance new factories.

Over two decades, Hefei has been transformed by the municipal government’s bets on companies such as flat-panel display maker BOE Technology Group and electric car maker Nio. When Nio nearly ran out of cash in 2020, the Hefei government invested $1 billion for a 24 percent stake and state-controlled lenders invested another $1.6 billion.

Hefei, a provincial capital in a previously poor agricultural region, has leapt up the income rankings of Chinese cities. Local government cadres, urban economists and institutional investors visit Hefei to study its methods.

hefei has one $86 billion municipal holding company Which has invested 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 investment. The city then provides incentives for these companies’ suppliers and customers to relocate to Hefei, said Li Bo, an assistant professor at the Guanghua School of Management at Peking University.

“Hefei has a clear understanding of local industries – the government-led investment fund is tailored to the needs of companies,” he said.

Hefei is at the top of many industrial supply chains. One-fifth of the world’s liquid crystal displays for consumer electronics are made in Hefei. There are many such Lenovo laptop and notebook computers. Hefei produces one-tenth of China’s home appliances. The city government has provided $2 billion of the $2.5 billion needed to build China’s first factory for advanced types of computer memory chips.

Production of electric cars in Hefei quadrupled last year, and will rise further this year as Volkswagen expands production at a huge new factory. Gaoshan High-Tech Co., an electric car battery maker partly owned by VW, has also built a factory in Hefei.

Other Chinese carmakers are following. BYD, which is competing with Tesla to become the world’s biggest maker of electric cars, has almost completed a $5.6 billion factory complex with a planned capacity of 1.3 million cars per year.

Much of the credit for Hefei’s success goes to a top engineering university, just as Carnegie Mellon University has fueled Pittsburgh’s technological renaissance. Most of China’s top universities are in Beijing or Shanghai. but on leaders University of Science and Technology of China The institution was relocated from Beijing during the chaos of Mao’s Cultural Revolution and ended up in relatively peaceful Hefei in 1970.

In 2005, Sun Jinlong, a new municipal leader in Hefei, took the lead in focusing the city on technological manufacturing. BOE Technology was then based primarily in Beijing but was struggling financially. The city persuaded the company to build factories in Hefei, offering investments and loans of more than $1 billion.

Subsequent company statements from BOE Technology show that from 2011 to 2016, it collected $250 million in direct subsidies from the city. BOE Technology is now one of the world’s largest manufacturers of flat-panel displays.

was a powerful ally in promoting Hefei’s success. Li Keqiang, China’s second-highest official and prime minister until his retirement about a year ago, grew up in Hefei.

During a visit to the city in 2015, Mr Li promoted his “Made in China 2025” plan. That plan called for replacing many imported advanced manufactured goods with Chinese production by 2025, using industrial policies similar to those in Hefei. Mr. Lee died in October.

Hefei still faces challenges. Despite the low cost of living, automakers have had trouble convincing executives and engineers to leave the glitter of Shanghai or Beijing for a quieter life in Hefei. BOE Technology has its headquarters in Beijing.

But Hefei’s biggest problem is housing.

Until China’s housing crisis reached Hefei two years ago, construction and real estate development were slightly larger than manufacturing in the city. Apartment buildings, office towers and hotels loom over small farms left over from the city’s recent agricultural past.

The reliance on manufacturing is now hurting Hefei.

The number of new apartments sold each month in Hefei declined, according to China Index Academy, a property market data provider. By November, sales were down 45 percent from a year earlier.

The decline in sales is weakening the ability of debt-laden real estate developers to finance new projects. Last year the total floor area of ​​new projects dropped by 57 percent by 2022.

As developers run out of money, they buy less land leases from the government. The sale of these leases, a cornerstone of local government budgets in China, typically covers half of Hefei’s municipal spending. Lease sales in Hefei dropped 38 percent last year, putting government programs at risk.

Small businesses say the local government, previously a big customer, has stopped placing orders.

“The government has run out of money – it’s drained,” said Tao Yingcheng, a flooring business owner 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 hire graduates from the best universities elsewhere.

“The current employment environment is not very good,” said Xu Mingyi, a Hefei resident who studied computer programming and still can’t find work in his field. He is working as a ride-hail driver. “These companies in Hefei need such talents that ordinary people can hardly meet their needs.”

li yu Contributed to research.

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