Hefei's 'Hefei Model' cultivates semiconductor giant, yielding massive returns

Changxin Memory Technologies (CXMT), a major Chinese memory chip manufacturer, has become the largest company by market capitalization on China's mainland stock market shortly after its listing on the Shanghai Stock Exchange's STAR Market late last month. Uniquely, the company's ownership structure is dispersed among various shareholders, with no single dominant shareholder. Notably, CXMT's first and second largest shareholders are investment funds created by the municipal government of Hefei, the city in eastern Anhui province where the company is based.

These Hefei municipal government funds acquired their stakes in CXMT in March 2023, purchasing shares for 1 yuan each, totaling 19.7 billion yuan (approximately $2.7 billion). Following the company's stock market debut, the value of these two funds' holdings surged to 984 billion yuan (approximately $136 billion) based on the closing price on January 27th. This represents an approximate 50-fold increase in book value and a cumulative investment return of over 5,000% in just over three years.

The 'Hefei Model,' characterized by local governments actively leading investments in advanced industries such as semiconductors, is considered an exceptional case even within China's state-capitalist framework. Unlike traditional methods of providing subsidies or low-interest loans from state-owned banks, this model involves local governments directly acquiring equity in promising companies, functioning akin to private venture capital or investment banks. When companies that receive such strategic investments grow and list on the stock market, the profits are recouped, and the capital is reinvested into other industries, creating a virtuous cycle.

This approach has been instrumental in fostering industrial ecosystems tailored to local needs. Hefei has previously invested heavily in companies like BOE Technology, a global display giant, and NIO, an electric vehicle manufacturer. In 2008, during the financial crisis, Hefei invested a significant portion of its treasury in BOE's rights issue and pledged to cover losses, successfully attracting the company's manufacturing base. The city further supported the development of a large-scale display industry cluster through active investment in factory construction. In 2020, Hefei invested 7 billion yuan (approximately $970 million) in NIO during its liquidity crisis, leading to the relocation of the EV maker's headquarters and core operations to Hefei, significantly strengthening the region's electric vehicle cluster.

The 'Hefei Model' offers significant lessons for South Korea. By overcoming the inefficiencies of government-led investment and nurturing regional industrial ecosystems, it provides a valuable reference for South Korea, which aims to alleviate the concentration of economic activity in the Seoul metropolitan area and foster advanced industries like AI and semiconductors. Seo Chang-bae, a professor of Chinese studies at National Pukyong University, observed, "In the past, Anhui Province and Hefei were underdeveloped regions within China, but now the population of Hefei exceeds 10 million due to the influx of young people." He advised, "Instead of pursuing a 'do-as-others-do' approach to secure central government subsidies, local governments in South Korea should focus and concentrate investments tailored to their regional industrial structure and characteristics."

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In the past, Anhui Province and Hefei were underdeveloped regions within China, but now the population of Hefei exceeds 10 million due to the influx of young people. Instead of pursuing a 'do-as-others-do' approach to secure central government subsidies, local governments in South Korea should focus and concentrate investments tailored to their regional industrial structure and characteristics.