What Hefei, China’s EV City, Says About the State of the Economy

Ultramodern factories churn out electric cars and solar panels in Hefei, an industrial center in the heart of central China. Broad avenues link office towers and landscaped parks. Subway lines open at a brisk pace.

Yet at Hefei’s market for construction materials, which fills 10 city blocks, local merchants are gloomy. Wu Junlin, a vendor of doors, has closed two of his three stores and laid off all but one of his dozen employees.

“I have 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 better showcases the opportunities and vulnerabilities of China’s economy than Hefei.

Government-directed growth in industries like 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 decline in real estate has devastated the finances of millions of families and small businesses — including in Hefei.

Hefei and nearby towns have become an E.V. manufacturing hub, with overall car production nearly tripling since 2019 and now exceeding Michigan’s. Hefei’s industrial policies have been so successful in nurturing technology manufacturers that the country’s central government has embraced tenets of what is known as the Hefei model.

Now so many cities are subsidizing electric vehicle factories that the industry faces severe overcapacity and heavy losses.

“Some localities and enterprises are still blindly launching and duplicating new energy vehicle projects — these require our great attention, and effective measures should be taken to solve them,” Xin Guobin, a vice minister at China’s Ministry of Industry and Information Technology, said at a news briefing last week.

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

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

A provincial capital in a previously impoverished farming area, Hefei has leaped up the income rankings of Chinese cities. Local government cadres, urban economists and institutional investors visit Hefei to study its methods.

Hefei has an $86 billion municipal holding company that has put money into struggling but technologically advanced companies. The holding company, the fourth-largest of its kind in China, buys company shares on the cheap when few other investors want them.

These companies sometimes recover, as BOE Technology and Nio did after Hefei’s investments. The city then provides incentives for these companies’ suppliers and customers to relocate to Hefei as well, 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 companies’ needs,” she said.

Hefei sits atop several industrial supply chains. A fifth of the world’s liquid crystal displays for consumer electronics are made in Hefei. So are many Lenovo laptop and notebook computers. Hefei produces a tenth of China’s home appliances. The city government has provided $2 billion of the $2.5 billion needed to build China’s first factories for an advanced kind of computer memory chips.

Hefei’s output of electric cars quadrupled last year, and that will soar further this year as Volkswagen ramps up production at a giant new factory. An electric car battery manufacturer partly owned by VW, the Gotion High-tech Company, has also built a factory in Hefei.

Other Chinese carmakers are following. BYD, which is vying with Tesla to be the world’s largest maker of electric cars, 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 top engineering university, in much the same way that Carnegie Mellon University has fostered the tech renaissance of Pittsburgh. Most of China’s top universities are in Beijing or Shanghai. But leaders at the University of Science and Technology of China relocated the institution from Beijing during the chaos of Mao’s Cultural Revolution, and it ended up in relatively tranquil Hefei in 1970.

In 2005, a new municipal leader in Hefei, Sun Jinlong, pioneered the city’s focus on tech manufacturing. BOE Technology was mainly in Beijing then but struggling financially. The city persuaded the company to build factories in Hefei, offering more than $1 billion in investment and loans.

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

Hefei had a powerful ally in promoting its success. Li Keqiang, China’s second-highest official and premier until his retirement nearly a year ago, grew up in Hefei.

During a trip 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 that echoed Hefei’s. Mr. Li died in October.

Hefei still faces challenges. Automakers have had trouble persuading executives and engineers to leave the glitter of Shanghai or Beijing for quieter lives in Hefei, despite the low cost of living. BOE Technology has kept its headquarters in Beijing.

But Hefei’s biggest problem lies in housing.

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

That dependence on construction is hurting Hefei now.

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

The nosedive in sales is crippling the ability of debt-laden real estate developers to finance new projects. The total floor area of new projects last year plummeted 57 percent from 2022.

As developers run out of money, they buy 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. Lease sales fell 38 percent in Hefei last year, imperiling government programs.

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

“The government is out of money — emptied out,” said Tao Yingcheng, the owner of a flooring business in Hefei.

Some local workers also complain that they lack the skills to compete for jobs. Companies like Nio and Volkswagen rely increasingly 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 has not been able to find work in his field. He is working instead as a ride-hail driver. “These companies in Hefei need talents such that ordinary people hardly meet the requirements.”

Li You contributed research.