Hefei has emerged as one of China’s leading centres for advanced manufacturing, with factories producing electric vehicles, display panels and semiconductors while engineers work on new technologies. Yet the city’s rapid industrial expansion has not translated into equally strong consumer spending, revealing a growing imbalance in China’s economy.
Located about three hours west of Shanghai by high-speed train, Hefei has become a showcase for China’s strategy of using government funding and policy support to develop high-tech industries and create nationally competitive companies.
In the city’s industrial areas, the results are striking. Companies such as ChangXin Memory Technologies (CXMT), BOE Technology Group and electric-vehicle maker NIO have established major operations there. CXMT, which produces DRAM chips used in artificial intelligence applications, completed Asia’s biggest initial public offering of 2026. BOE is a major display-panel manufacturer, while NIO develops electric vehicles.
However, Hefei’s bustling factories contrast sharply with conditions in parts of its commercial centre. Some shops have struggled to attract customers, while businesses report weaker consumer confidence and reduced spending power.
Sarah Meng, who owns a jewellery store in the city’s main shopping district, said she expected sales of silver necklaces, bracelets and pendants to decline by 10% to 20% this year.
Restaurant owner Yu Yucan, 37, also described a difficult environment. While some businesses are performing strongly, he said many others are struggling as consumers become more cautious.
The contrast between industrial output and household demand is particularly visible in Hefei’s economic figures. The city’s economy expanded 6.8% year-on-year during the first half of 2026, the fastest growth rate among major Chinese cities and significantly above the national rate.
Factory production increased 25.6%, while exports jumped 51.9%. Retail sales, however, grew by only 0.6%. The resulting 25-percentage-point difference between production and consumption was a record for the city and around six times the national gap.
HSBC chief Asia economist Fred Neumann said Hefei demonstrated a problem affecting economies in China and elsewhere: the difficulty of converting success in high-tech industries into broader economic gains, particularly stronger consumption.
The city’s transformation began in earnest in 2008, when local authorities started supporting promising but loss-making companies while directing investment toward strategic industries. Government incentives were also used to attract high-tech businesses.
Hefei’s economy has more than doubled over the past decade, while its population has risen above 10 million as workers and university graduates moved to the city. In 2025, the city produced about 1.37 million electric vehicles, equivalent to roughly one in every 12 vehicles manufactured in China.
CXMT’s July stock-market listing delivered another major benefit. The value of stakes held by state investors linked to Hefei increased more than fivefold following the listing, surpassing 1 trillion yuan ($148.9 billion).
The city’s location in the Yangtze River Delta, its large pool of university-trained talent and its labour supply helped create favourable conditions for industrial development. A defining characteristic of the Hefei model has been the willingness of government-backed investors to commit capital at an early stage, sometimes before private commercial investors.
Yet policymakers and economists warn that the approach carries risks when repeated too broadly. China is now pursuing an “anti-involution” campaign aimed at reducing destructive price competition and excess industrial capacity. Falling corporate profits and deflationary pressures have raised concerns that local governments may continue investing in similar industries at the same time.
Louis Kuijs, chief Asia Pacific economist at S&P Global Ratings, said successful strategies from China’s strongest regions could offer useful lessons, but warned against simply replicating one local government’s approach nationwide. Such a policy, he said, could create duplication, further “involution” and deeper mismatches between supply and demand.
For workers with specialised skills, Hefei’s industrial expansion has nevertheless created opportunities. Average annual pay at urban non-private companies, including firms such as CXMT, rose 3.4% to 126,259 yuan in 2025, after increasing 2.5% in 2024.
Frank Kong, 27, secured an R&D position at a local technology company after university and now earns about 250,000 yuan annually. He said opportunities in high-tech manufacturing were plentiful in Hefei compared with cities of a similar size.
The benefits are less apparent for lower-income workers. Xia, a taxi driver who earns less than 5,000 yuan per month, said Hefei offers significant opportunities for talented people but presents a different reality for ordinary workers.
Hefei’s experience therefore illustrates both the strength and limitations of China’s state-led industrial strategy: government investment can rapidly create high-tech champions and expand manufacturing, but without stronger household demand, that industrial success can contribute to excess supply, rising exports and greater trade tensions with China’s international partners.
