China’s property problems and US sanctions have hit some cities hard

BEIJING — China’s property struggles and U.S. sanctions have significantly hurt some of its cities, even as others benefit from Beijing’s technology boost, the Milken Institute’s China Index of Best Performing Cities showed on Tuesday.

Since 2015, the index has studied China’s large and medium-sized cities for their economic dynamics and growth prospects. The latest version broadly compares data for 2023 to 2021. Last year, the institute did not publish a report due to a reevaluation of its methodology.

Hangzhou, the capital of eastern Zhejiang province and home to Alibaba and other technology companies, topped this year’s ranking.

While other cities such as Zhuhai, once a “rising star”, have fallen in the rankings due to the real estate slump.

The city, in southern Guangdong province near Hong Kong, dropped 32 places from the previous index published in 2022, ranking 157th.” Suddenly, nobody bought houses.

Builders didn’t have much money to complete their projects,” Perry Wong, the institute’s general director of research, told reporters in Mandarin, translated by CNBC.

Property and related sectors once accounted for more than a quarter of China’s gross domestic product. But in 2020, Chinese authorities began cracking down on real estate developers’ high reliance on debt.

Wong added that real estate has dragged down growth for several of the main cities in that region, with the exception of Dongguan. The factory city, home to Huawei’s sprawling European-style campus, has instead been hit by US sanctions. Dongguan dropped 15 places in the Milken index ranking to 199th.

There are 217 cities in the index. While nearby metropolis Shenzhen rose in the rankings, the city landed in 9th place, behind Beijing. Most of the Chinese companies initially blacklisted by the US were based in Shenzhen or Beijing, Wong pointed out in an interview with CNBC.

“Zhuhai is an extremely good place to do service jobs, to do even manufacturing jobs, high-end biotech manufacturing jobs,” he said. “So (barring the real estate impact) it should have a pretty promising future.”

Another city affected by the geopolitical force on exports is Zhengzhou, the capital of Henan province and home to iPhone maker Foxconn. Zhengzhou fell to 22nd, down from 3rd.

Historically, Wong pointed out, control over Zhengzhou, Hefei and Wuhan was essential to securing control of the country.

Economically, Hefei in Anhui Province and Wuhan in Central China’s Hubei Province fared better in the latest index.

Wuhan climbed nearly 30 places to second place, while Hefei remained in the top ten. Wong attributed this to Wuhan’s efforts to keep factories running during the pandemic, allowing the city to bounce back quickly, while a university in Hefei received direct government support for technological development.

As for Hangzhou’s success, the institute’s research pointed to the city’s growth as a center for e-commerce, manufacturing and finance.

But asked on CNBC’s “Squawk Box Asia” whether Hangzhou’s success could be replicated, Wong said it would be difficult, in part because of the performance of the local real estate sector which is driving up the cost of living.