[Big read] From underdog to deep-tech pioneer: Will Anhui’s bet on the future pay off?

(Edited and refined by Bai Kelei, with the assistance of AI translation.)

How does a city stand out from the competition? Foresight, courage and finally, patience.

In Hefei, the capital of Anhui province, Yang Zhida, general manager of nuclear fusion company Xeonova, summed up the city’s rise with these three qualities as he stood before a piece of fusion equipment resembling a giant dumbbell.

Yang’s goal is to build a hundred-megawatt-class fusion engineering reactor by 2035 to further the commercialisation of fusion power. Having embarked on his entrepreneurial journey two years ago, he told Lianhe Zaobao with conviction, “If you don’t take a chance, you’ll end up very ordinary. These are strategic bets. Hefei understands future industries.”

Today, Hefei is one of China’s nuclear fusion hubs, home to at least 70 companies across the industry’s supply chain. Fusion is only the latest example of Anhui’s bets on emerging industries. From semiconductors and display panels to new energy vehicles, successive waves of industries have taken root and expanded here in recent years. Once seen as an also-ran in the Yangtze River Delta, this province in the central eastern region of China is increasingly taking centre stage in the country’s economy.

In July this year, Hefei-based memory chipmaker ChangXin Memory Technologies (CXMT) topped the A-share market by market capitalisation following its listing, bringing Anhui into the spotlight. The province’s GDP grew 5.6% year-on-year in the first half of this year, placing its economy among China’s ten largest.

(English closed captions are available for the above video.)

Once mocked for its lack of presence, Anhui is now the protagonist in an underdog success story, prompting the question: what exactly did it get right or bet on correctly?

Betting on frontier technology

Anhui’s development has not been smooth sailing. After China began reform and opening up in the late 1970s, the neighbouring economies of Shanghai, Jiangsu and Zhejiang took off first, drawing people away from Anhui. The province remained a major source of migrant labour for years, lagging behind in industrialisation and economic development.

The turning point came in the mid-2000s. In 2005, Hefei adopted a strategy of building its economy around industry, attracting home appliance giants such as Haier and Midea. It gradually became one of China’s main home appliance manufacturing bases.

As its industrial base strengthened, Hefei made three investments that attracted widespread attention. In 2008, it brought in display panel maker BOE, which was struggling with heavy losses. In 2016, it provided funding to help establish memory chipmaker CXMT. In 2020, it funded the arrival of financially troubled new energy vehicle maker Nio.

All three investments involved substantial participation by local state-owned capital. BOE, CXMT and Nio subsequently grew rapidly and delivered impressive results. This approach became known as the “Hefei model”: the local government uses state-owned capital to take the lead, investing in companies and acquiring stakes on market-based terms to bring projects to the city and build industrial clusters. It then exits at an appropriate time and reinvests the proceeds in new businesses.

Unlike traditional investment promotion methods such as land and tax incentives, this model uses capital to drive industrial development. As several key investments yielded substantial returns, the “Hefei model” gained prominence, earning Hefei accolades such as “China’s top venture capital city”.

Some see Hefei as being lucky enough to bet on the right industries. Xeonova’s Yang, however, believes its success reflects an ability to assess frontier technologies. “Hefei dares to bet on industries that will only take off in the future and it has got those bets right several times in a row. That shows its leaders have a strong grasp of scientific and technological innovation,” he said.

Yang himself takes a practical approach. He deliberately keeps sofas out of his office because “anything said while lounging on a sofa is just idle talk”.

Hefei officials’ working style suits him well. He shared, “They are very efficient. They don’t waste your time with bureaucratic or empty talk. Since I started my business, my dealings with them hasn’t involved any drinking sessions at all.”

The professional judgement of Hefei officials is underpinned by the city’s research ecosystem. Wang Le, founder of investment promotion media platform Zhaoshang Yinzi Neican (招商引资内参), provides advisory services to local officials seeking investment and has interacted with officials from Hefei. He told me that the city is home to the University of Science and Technology of China, which comes directly under the Chinese Academy of Sciences. Its extensive research resources provide important support for the development of frontier industries.

In particular, these research capabilities provide expert inputs for industrial policy decisions. Wang said, “Hefei’s approach to assessing industries is very well developed. It has moved from leader-centred to team-based assessments, and increasingly places trust in scientists’ judgements.”

Riding Yangtze Delta wave

Anhui’s catch-up has also benefited from its location and the opportunities of the times. As the Yangtze River Delta developed and production costs rose, some manufacturing operations in Shanghai, Jiangsu and Zhejiang began moving to surrounding areas in the late 2000s. In 2018, the integration of the Yangtze River Delta was elevated to a national strategy, further facilitating Anhui’s integration into the regional economy.

Wang cautioned against overlooking the opportunities created by the outward expansion of industries from the Yangtze River Delta. He explained, “If not for its location in the Yangtze River Delta, Anhui’s industrial development might not have been so successful.”

Anhui’s industrial structure has gradually transformed in recent years, changing its urban landscape. One of the most striking developments is its emergence as China’s largest car-making province.

Anhui was already home to carmakers such as JAC and Chery. Nio’s arrival in 2020 further strengthened its new energy vehicle industry, with BYD and other carmakers subsequently establishing operations there. Last year, Anhui produced 3.68 million vehicles, taking first place nationwide.

Another change is the upgrading of its electronics industry. BOE’s arrival in Hefei back in 2008 spurred the development of an advanced display industry spanning panels, polarisers and display light sources. Anhui subsequently expanded into semiconductors, including launching the CXMT project to develop dynamic random-access memory chip manufacturing. CXMT’s IPO in July this year was seen within the industry as a milestone in China’s drive for self-sufficiency in memory chips.

Anhui’s patient approach to breaking new ground is key to its industrial strategy that encompasses chips, advanced displays, new energy vehicles and AI integration.

Cultivating patient capital

Several entrepreneurs repeatedly mentioned “patience” when discussing Hefei’s development. It is evident not only in the relatively established chip, display, new energy vehicle and AI-related industries, but also in frontier fields such as nuclear fusion, quantum technology and biomedicine.

Han Qiu, co-founder of FutMat, a technology start-up focused on high-temperature superconducting materials for nuclear fusion, told me that although she was not particularly familiar with the workings of the “Hefei model”, she endorsed its underlying philosophy. “The government doesn’t look down on you just because you are still a long way from making money,” she said.

FutMat started out from a Hefei business incubator last October. It soon moved into an office building in the city’s high-tech zone and began production. Now, it is running out of space again. Han attributed much of the company’s rapid growth to governmental support for corporate services.

She said, “Traditional businesses are gradually declining, but science and technology ventures have very long development cycles. Yet the government has made up its mind to bear the cost of waiting several years and investing upfront to nurture future industries.”

Elsewhere in the high-tech zone, biomedical company Nuwacell, which has been based in Hefei for ten years, has witnessed the profound changes brought about by Anhui’s long-term industrial planning.

Nuwacell founder and chief scientist Yu Junying told me that Hefei felt like a small county town a decade ago. Over the past ten years, however, alongside its push in chips, displays, new energy vehicles and AI-related industries, the government has also invested in biomedicine and other sectors. “It invests early and in small companies, across different fields. It has a sharp eye, focusing on the future rather than the short term,” she said.

Lingering gaps in urban charm

As Anhui gains prominence, perceptions of the province are quietly changing. FutMat’s Han, an Anhui native, has experienced this first-hand. She joked, “Nanjing, the capital of Jiangsu, is very close to Anhui and has long been nicknamed ‘Anhui’s capital’. Many Anhui natives used to work in Nanjing, as though it was our provincial capital.”

But she sees more people returning to Hefei now. “As the city develops, it has given everyone another option of not having to leave their home province.”

Han particularly likes its science and technology start-up scene. “Everyone is young. We are building businesses together, discussing our aspirations and our lives.”

When I visited the Zhong’an Chuanggu science and technology park in Hefei’s high-tech zone, I saw young faces everywhere. Downtown, the pedestrian shopping street was also bustling with commercial activity. Yet Hefei still trails neighbouring Shanghai significantly in its infrastructure and international character.

A Shanghai visitor surnamed Chen, who was shopping downtown, said candidly, “It still feels like the 1990s or 2000s here. Even in the busiest area, some of the paving tiles are broken. It feels as though development hasn’t been as fast as I imagined.”

Han also acknowledged Hefei’s clear shortcomings in quality of life. “Culturally, Hefei is still a long way from becoming a thriving metropolis. People want entertainment and things to do outside work, but there is still very little of that.”

Anhui’s catch-up is incomplete. Investment consultant Wang Le noted that Anhui is “clearly not in the same league” as Jiangsu and Shanghai, be it in scientific and technological talent or industry specialists. Its industrial supply chains are also less comprehensive than those in Jiangsu, Zhejiang and Shanghai.

“Hefei has been in the spotlight in recent years and people may feel it has a few standout strengths, Hefei is not necessarily the strongest,” Wang said. He added that other places have developed different approaches, ideas and methods, making it difficult to rank them simply as better or worse.

Lessons behind broken bets

The “Hefei model” has accelerated Anhui’s economic development and become an object of study and emulation across China in recent years. But the initial enthusiasm has also given way to a more clear-eyed assessment.

Wang recalled that after Hefei signed an investment agreement with Nio in 2020, the carmaker’s share price surged, delivering outsized returns for the city and prompting many local governments to try to learn from the “Hefei model”.

After Covid-19 pandemic controls were eased in late 2022, visitors flocked to Hefei to learn from its experience. “At that time, the rush to study the ‘Hefei model’ had become almost frenzied,” Wang shared.

That enthusiasm has now passed its peak. Wang said discussions had become more rational, with people recognising that “you cannot just look at how much money Hefei made from investing in Nio and CXMT. There have been failures too.”

One notable example was Hefei’s move in 2007 to bring in high-profile shipbuilder Jiangsu Rongsheng Heavy Industries. The city also spent heavily on upgrading waterways to improve transport capacity. But as the shipping market contracted around 2012, Rongsheng fell into a debt crisis and the project faltered.

In May this year, a controversy over technology company Dreame Technology prompted renewed scrutiny of local governments’ usage of investment funds to attract businesses. Dreame founder Yu Hao was accused of using exaggerated marketing claims to induce local governments eager for investment to inject capital.

In an article, Nie Huihua, a tenured professor at Tsinghua University’s School of Social Sciences, argued that using funds to attract businesses could ultimately leave both governments and companies worse off. One reason was that governments undertaking venture capital investment themselves ran counter to general market principles. He wrote, “Government investors are no better than market participants at identifying and selecting frontier technologies or industrial models.”

Chinese authorities have recently begun reining in the use of funds to attract investment. In June this year, the State Council issued guidelines imposing strict controls on the establishment of new government investment funds, with counties and districts generally barred from setting them up. A report by Sinolink Securities’ research institute said the move was intended to distinguish genuine applications of the “Hefei model” from imitations, and curb practices such as providing fiscal subsidies and channelling benefits under the guise of industrial investment funds.

Evolving beyond megaprojects

On the sustainability of the “Hefei model”, Tan Kong Yam, emeritus professor of economics at Nanyang Technological University, told me that its first iteration involved relatively large, highly concentrated strategic investments. But the risks associated with simply repeating the same are growing.

Tan explained that large-scale investments create greater concentration risk, while competition among Chinese cities for high-quality companies is becoming increasingly intense. Local governments also face mounting fiscal and debt constraints.

He believes the “Hefei model” must become less dependent on a handful of headline-grabbing megaprojects, shift towards less capital-intensive and more technology-intensive investments, and build a more diversified portfolio.

Although unquestioning admiration for the “Hefei model” has ebbed, investment consultant Wang believes the key is that “it caused a fundamental change in thinking”. He said, “People realised that beyond tax rebates, there are market-based methods to help companies address their funding issues.”

Looking back, Anhui’s rise also offers a snapshot of the changing drivers of China’s economic growth. Wang said that as property and infrastructure became less powerful engines of growth, greater emphasis was being placed on manufacturing, technological innovation and industrial investment. “Put these three together and they seem to describe the path Hefei has taken over the years. In a sense, Hefei has become a testing ground for China,” he said

Xeonova’s Yang believes that Hefei’s resolve to invest in the future will bring further rewards. Inside his factory stands a field-reversed linear advanced mirror experiment (FLAME) device that departs from the mainstream approach to nuclear fusion technology in the hope of creating a small-scale “artificial sun” at lower cost.

While success remains uncertain, Yang told me confidently, “Many future industries won’t take off this year or next year. You have to wait a while. Patience is a very important quality. I believe Hefei will make the right bet again.”

This article was first published in Lianhe Zaobao as “中国特稿：敢押敢投跑出经济黑马 安徽翻身路上拼耐力赌新局”.

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