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

Yet at Hefei’s market for construction materials, 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.

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 EV 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.

The Hefei model consists of using government money to buy newly issued shares in manufacturers and startups that need cash. Officials also arrange loans with attractive interest rates from state-controlled banks to finance new factories. Hefei sits atop several industrial supply chains. One-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 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 factories for an advanced kind of computer memory chip. But Hefei’s biggest problem lies in housing.

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% 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% 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% in Hefei last year, imperiling government programs.