A stroll down “Quantum Boulevard” reveals one of many world’s tightest concentrations of bleeding-edge know-how companies. Dozens of firms feed a quantum-computing provide chain that didn’t exist a couple of years in the past. Their wares embrace a few of the most superior commercialised know-how on the planet. The district is hardly a decade outdated; not way back probably the most fashionable tech within the space was farming gear. And it’s in an unlikely spot: Hefei, the capital of Anhui, one among China’s much less fancied provinces.
China’s progress is flagging, however its financial miracle seems alive and effectively in Hefei. Home to about 9.6m individuals, the inland metropolis noticed its GDP develop by greater than 8% a 12 months on common from 2012 to 2022. Once thought of backward and poor, Hefei’s residents now get pleasure from a disposable earnings that comfortably exceeds China’s city common (see chart).
The metropolis’s success owes a lot to what some name the “Hefei model”. A singular mixture of local-government funding and personal enterprise, the mannequin has been described as state capitalism at its greatest. It has fostered industries like high-end manufacturing, electrical automobiles (EVs), biotech and semiconductors. These so-called strategic, rising industries now account for over 56% of Hefei’s industrial output, in contrast with lower than 27% in 2013. Whatever native officers have been doing, it seems to be “the right mix of industrial policy and private-sector mojo,” says Robin Xing, an economist at Morgan Stanley and a Hefei native.
This type of progress is exactly how Xi Jinping, China’s chief, envisions the nation’s future. Hefei’s technological progress chimes with Mr Xi’s name for an “Industrial Revolution 4.0”, wherein China shakes off “low-quality” progress—low cost manufacturing and debt-financed homebuilding—by capturing completely new industries and their provide chains. This imaginative and prescient reserves particular consideration for the inland backwaters which have missed out on a lot of the web growth in coastal provinces. If Mr Xi has his approach, the following decade of growth will look extra like Hefei than at present’s tech hubs of Shenzhen and Hangzhou.
BOE Technology, the world chief in LCD shows, has a few of its principal factories in Hefei. So does NIO, one of many world’s fastest-growing ev firms. China’s chief in voice-recognition synthetic intelligence, iFlyTek, was based by the native college. Its most superior DRAM chipmaker, CXTM, was co-founded by the native authorities.
Foreign firms have additionally endorsed Hefei’s effectivity. Volkswagen, a German carmaker, has operated manufacturing crops within the metropolis for years. Earlier this 12 months it introduced plans for a €1bn ($1.1bn) innovation centre in Hefei that may assist design evs. Such hubs are uncommon outdoors China’s largest coastal cities, particularly for multinationals. Few inland areas can muster the expertise, logistics and provide chains to foster them. But Hefei has the appropriate situations to arrange such a facility, says Ralf Brandstätter, Volkswagen’s China chief.
Boulevard of unbroken desires
Hefei’s success has stirred loads of curiosity. Delegation after delegation of officers from much less affluent areas have visited town within the hopes of taking some financial magic again dwelling.. A employees member at a state funding group in Hefei says his agency is booked to capability over the following month internet hosting guests from different metropolis governments.
They will shortly be taught the mannequin’s important substances. The first is a big pool of extremely educated, motivated individuals. Hefei is way sufficient inland—about 470km from Shanghai—to have missed out on the Nineties growth within the Yangzi river delta. But it’s shut sufficient to soak up the affect of its better-off neighbours, giving it what Anhui locals say is a scrappy, underdog angle.
During the Cultural Revolution, a politically tumultuous interval between 1966 and 1976, the University of Science and Technology of China (USTC) was pressured to go away Beijing. The nation’s high tech faculty tried a number of cities earlier than settling in Hefei in 1970. In the flight from political violence, usually directed at lecturers, it misplaced greater than half its students and gear.
But utsc has now re-emerged as a worldwide centre for science. The surrounding training system has additionally flourished, giving town a excessive density of fine faculties, notes Christopher Marquis, the co-author of “Mao and Markets: The Communist Roots of Chinese Enterprise”.
That has made it a hub for superior know-how. USTC has designed China’s most superior quantum pc. Not far-off on the Institute of Physics, scientists are testing one of many world’s most superior fusion-energy reactors, the Experimental Advanced Superconducting Tokamak. The earliest human trials with CRISPR, a genetic-engineering software, had been carried out at a Hefei hospital in 2015. Since then a thriving biosciences trade has sprung up.
A second ingredient of the Hefei mannequin is the move of expertise. The metropolis authorities often recruits from the engineering and science departments of native universities. It additionally encourages exchanges between authorities workplaces, college departments and corporations, constructing belief and networks. One native cadre spent years at USTC serving to researchers determine marketable patents, whereas holding a authorities place. Businesspeople in Hefei say officers all through the native administration can talk about trade subjects in depth.
A 3rd issue is the “chain boss” system. The authorities has created teams of companies in 12 industries, together with semiconductors, EVs, quantum sciences and biotechnology. Each group has a “chain boss”: a authorities official who oversees big-picture planning for the trade. In 2020, for instance, Hefei’s Communist Party chief was the chain boss of town’s integrated-circuits trade. The mayor oversaw the display-screen trade.
These bosses work with a state-appointed “chain leader”, usually the dominant firm inside an trade. The authorities passes coverage instructions to this chief, which shares them with different firms within the provide chain. Companies and officers use this communication channel to debate the allocation of state capital, the sourcing of supplies and potential bottlenecks in provides, famous Ni Hua, an analyst at East Asia Qianhai Securities, in a report final 12 months.
Before the state invests in a brand new firm, officers seek the advice of with all members of a series to know how the newcomer will slot in, says an govt at a neighborhood quantum-computing agency. One younger entrepreneur who just lately began a enterprise in Hefei says that breaking into these trade teams is extremely tough. There is little scope for ruthless competitors inside provide chains. Instead the main target is on beating firms in different areas or international locations.
The fourth ingredient within the mannequin is state capital. While cities elsewhere on the planet fund faculties, construct sewers or home the poor, Hefei’s administration ploughs cash into probably the most promising firms it could determine. It has been described as a “government of investment bankers”. Its outlays move primarily by means of three automobiles. Each has sprawling portfolios spanning lots of of investments.
Chained melody
These investments give town authorities broad attain. Companies resembling BOE, the display-maker, and NIO, the ev agency, stand on the centre of huge provide chains. Smaller firms transfer to Hefei to be nearer to them. Most stay privately owned. But in the event that they go well with the federal government’s plan for the provision chain, they may most likely appeal to some state funding. In this manner whole provide chains are linked up by only a few state traders that reply to town authorities.
For practically a decade cities and provinces throughout China have been experimenting with state-backed enterprise capital, elevating as a lot as $1trn. But a lot of their investments have yielded mediocre returns at greatest. China’s venture-capital state has been written off as a money sink and a first-rate alternative for corruption. Last 12 months, for instance, anti-corruption authorities rounded up executives at China’s premier state fund, the National Integrated Circuit Fund, in an try to weed out graft.
What units Hefei aside? The metropolis’s state capitalists have clearly benefited from town’s historical past and site. Not each inland metropolis can be taught from Shanghai with out being swamped by it, or present refuge to an awesome college. The tight hyperlinks of the “chain boss” system additionally make sure that Hefei’s state capitalists don’t make investments with out steerage from trade.
Hefei’s state traders have additionally been unusually adventurous. Most cities lack the experience to run private-equity funds. And they don’t have incentives to make bets with distant, unsure pay-offs. Cadres usually spend simply 5 years in a single location. Even if a long-term funding had been to succeed, they’d not be round to get pleasure from their triumph. These brief horizons inhibit officers’ funding selections. Many authorities funds, for instance, have put cash into chip designers not chipmakers, notes Tilly Zhang, an analyst at Gavekal Dragonomics, a analysis home. Chip design is much less capital-intensive and faster to point out returns.
Hefei’s state capitalists haven’t any such inhibition. The native authorities’s first huge punt was a $5.2bn funding in BOE in 2008. (Officials delayed the development of a subway system so as to scrape the funds collectively.) The LCD display screen trade was then dominated by South Korea and Japan. Critics famous that it could take years to for Chinese companies to have the ability to compete. But BOE ultimately constructed a number of crops in Hefei and has since come to dominate the worldwide trade.
NIO, the electric-car maker, was even riskier. In 2020 the group was on the snapping point when Hefei invested 5bn yuan ($700m). nio then moved its China headquarters and a few manufacturing amenities to town. In lower than two years NIO had recovered and its share worth soared. The metropolis made a return of as much as 5.5 instances its preliminary funding, in response to Bloomberg. Hefei Jiantou, a authorities fund that invested in each BOE and NIO, has taken in funding earnings of not less than 5bn yuan every year between 2019 and 2021.
For Mr Xi’s financial imaginative and prescient to succeed, the Hefei mannequin must unfold far past its place of birth. Smaller cities must sprout huge companies in main industries, resembling EVs, photo voltaic vitality and chips. One quantum boulevard won’t be sufficient.
But experimentation in a single metropolis has usually supplied a template for the remainder of the nation. The “Shenzhen model” within the Nineteen Eighties, for instance, pioneered the mix of Chinese labour and international capital that turned southern China into the workshop of the world. Around the identical time the “Wenzhou model”, named after the south-eastern port metropolis, confirmed that family factories, usually financed by household financial savings, may succeed, with the assistance of peripatetic gross sales brokers travelling up and down the nation.
Can the Hefei mannequin even be exported? Several inland cities have comparable beginning situations, such pretty much as good faculties and powerful industrial bases. Such locations may be capable to replicate a few of Hefei’s funding methods, says Mr Xing.
But Hefei’s success means that training, trade and geography are usually not sufficient. Political incentives should additionally align. Mr Xi often calls for loyalty and austerity from his cadres. The Hefei mannequin, alternatively, requires gumption and daring. State capitalists have to be ready to take the sort of dangerous bets that don’t at all times repay. The mannequin can’t achieve different cities until their native cadres are free to fail. ■
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Source: www.economist.com”