Tucked away in the corner of a busy shopping mall in Wangjing, a district in northeast Beijing, black-and-orange compartments entice passersby with a colorful pitch. “Only 1 yuan for 12 hours!” reads one bright poster. The metal boxes, which look much like vending machines, contain umbrellas; to unlock an umbrella, customers scan a QR code with their smartphone and pay an hourly rate plus a small deposit through Alipay or WeChat Pay—two popular Chinese mobile payment apps. These “brollies” are only one recent addition to China’s red-hot sharing economy, which was worth $520 billion in 2016—a 103 percent year-on-year increase. But despite the charm and utility of shareable umbrellas, bicycles, and even basketballs, there are many warning signs that China’s sharing economy has reached peak growth and that the coming months will see a wave of bankruptcies and consolidations as many start-ups built on unsustainable models fold.

China’s sharing economy is nascent but already impressive in scope. China already boasts 12 unicorns—private firms valued at $1 billion or more—in the sharing space, more than any other nation. These include world-beaters such as Didi Chuxing, which bought Uber’s China division in August 2016 after a protracted battle between the two firms, and is now the world’s largest ride-hailing company. Newer Chinese unicorns include Mobike and Ofo, two bike-sharing firms out of Beijing that innovated on a familiar model by allowing customers to park their bikes anywhere, in contrast to the more limited, dock-based systems dominant in the United States and Europe. Two years ago, there were barely any shareable bikes in Chinese cities. Today, there are over 16 million.

The rapid development of China’s sharing economy has been spurred by technological and social trends, supported in turn by explicit government backing. To begin with, China has nearly 700 million smartphone users and mobile payment apps are ubiquitous: two-thirds of smartphone users regularly utilize Alipay and WeChat Pay. In 2016, Chinese mobile transactions totaled $5.5 trillion, 50 times more than in the United States. The popularity of scan-and-pay apps, combined with China’s quick urbanization, fosters a consumer environment that is conducive to shareable bikes, balls, and umbrellas. Moreover, the high cost of living in first-tier cities such as Beijing and Shanghai may promote a “spirit of frugality,” in the words of one industry analyst.

A man walking with an umbrella in Shanghai, July 2013.
Carlos Barria / REUTERS

The sharing economy is also actively promoted by the Chinese government. At a time when traditional heavy manufacturing industries are shedding workers, Chinese policy makers are keenly aware of the importance of the service sector in absorbing these workers and sustaining growth. The development of a national sharing economy, or gong xiang jing ji, was articulated by Premier Li Keqiang in the 2016 Government Work Report. The objective was justified on dual grounds: “improving the efficiency of resource usage” and “making more people affluent.” In fact, the government is so invested in the creation of a national sharing economy that it has established a special think tank, the Sharing Economy Research Institute, dedicated to this sector. According to that organization’s research, the market value of China’s sharing economy is expected to grow at an average rate of 40 percent per year over the next several years, accounting for over ten percent of GDP by 2020. 

All of these factors combine—unsurprisingly—to create a rich and promising funding environment. Chinese and American venture capital firms, as well as technology giants such as Alibaba and Tencent, have poured tens of billions of dollars into hundreds of Chinese startups operating in the sector. Promising ventures, and perhaps unpromising ones, face no shortage of cash. Mobike and Ofo, for example, have each raised at least $1 billion in outside capital over the past 18 months. Earlier this year, 1.2 billion yuan ($180 million) of venture funding flooded a handful of shareable mobile charger companies over just a few weeks, stoking fears of a bubble.

Even the most celebrated of China's sharing start-ups face a precarious future.

Two characteristics of China’s sharing economy distinguish its firms from analogues in the West; the first is outcome-agnostic, the second may spell the demise of many new ventures. First, unlike the peer-to-peer sharing model dominant in the West, Chinese sharing firms can, in the words of Zhang Pinghe, a former venture-capital investor, “more accurately be called rental companies.” China’s first wave of businesses in the sharing economy, those that emerged in 2011-12, followed the traditional concept of peer-to-peer sharing. Start-ups such as Didi Chuxing and Tujia (China’s answer to Airbnb), allowed private individuals with idle assets (cars and spare rooms, in these cases) to make them available to others in exchange for money. This improved economic efficiency and created income-generating opportunities for a wide swath of the public.

But the companies that have emerged in the past two or three years, as part of China’s sharing “second wave,” follow  a much different notion of sharing. The bikes, phone chargers, and by-the-hour umbrellas are not owned by private individuals, but by their respective firms. Any revenues collected go straight to these businesses; it is a form of decentralized renting. In fact, rather than increase the utilization rate of existing assets—the hallmark of a conventional sharing economy—companies such as Mobike and Molisan, the Shanghai-based venture that rents out the umbrellas, are creating excess supply by churning out millions of brand-new bikes and umbrellas for their various rental stations and kiosks. While this may not be inherently unstable, it certainly undercuts much of what made the sharing economy so novel and disruptive in Western economies.

The second feature of Chinese sharing start-ups, however, is clearly a problem: the inherent fragility of many of their business models. Put simply, relatively cheap items (such as phone chargers and umbrellas) have a high rent-to-price ratio. This makes them unlikely to be sustainably attractive as shareable (that is, rentable) goods. Indeed, many of those mobile charger companies that attracted so much investment so quickly have already started to head for the exits, with some even reportedly absconding with customers’ deposits. Meanwhile, there have been prominent examples of umbrella- and bike-rental companies simply losing all of their inventory, since the deposit required for these goods was low enough that customers were willing to absorb the loss (or, simply, steal them).

A driver using the Didi Chuxing car-hailing application in Beijing, September 2015.
A driver using the Didi Chuxing car-hailing application in Beijing, September 2015. 
Jason Lee / REUTERS

But it’s not just the newest entrants that are struggling. Even the most celebrated of Chinese sharing start-ups—companies such as Mobike and Ofo, the global pioneers of the dockless bike-sharing system—face a precarious future. True, in this case the product solves an acute pain point: dockless bikes that charge customers a maximum of 1 yuan ($0.15) per hour solve the “last mile” problem of urban transport. And both government and customers love the fact that they are eco-friendly. But their successful adoption is also contingent on regulators allowing them to be parked haphazardly, and problems are already emerging in this respect. In Beijing and other Chinese cities, stories abound of piles of dockless bikes parked dangerously atop each other, blocking entrances to buildings and metro stations. Local governments in China have awoken to these problems, and authorities in Beijing, Guangzhou, Shanghai, and other cities are starting to impose moratoria on new dockless, rentable bikes. Faced with restrictions at home, it is logical for China’s 70-plus dockless bike-sharing firms to look abroad for ways to use their excess inventory. But in this, they face a familiar problem: any business scaled to China’s vast consumer market will have trouble replicating that volume in any foreign economy, especially when these foreign economies generally present stricter regulatory rules than those that limited its prospects in big Chinese cities in the first place.

Chinese sharing start-ups are still entering the market, and doubtless there will still be some big winners. Molisan, the Shanghai-based venture that rents out those umbrellas, is scaling up: it hopes to offer hundreds of thousands of shared umbrellas across China. But it is also a cautionary tale of the challenges. It faces intense competition from over a dozen other umbrella-sharing firms, most founded in the past two years and all bent on dominating the market. This leads, inevitably, to a low-margin, cutthroat economy with a limited endgame, where one or two firms—if, indeed, the model is viable at all—will survive as the others fail , taking investors’ cash with them.

China’s sharing economy is growing, but it shows all the signs of a coming correction. The next year or two will expose the shakiness of many of these firms’ basic models, instigating failures and a possible backlash from investors. For now, the low entry barriers mean that the battle will hinge on raising the most funding from committed venture partners; this could, of course, increase losses in the event of collapse. Staying on the good side of the government might be, in fact, most important. This summer, Ofo set up an internal Communist Party of China “committee” for employees who are party members. The committee is chaired by none other than the firm’s CEO himself. That might prove to be the smartest move of them all.

CORRECTION APPENDED (February 24, 2022)

An earlier version of this article incorrectly stated that at the time, the author was a Junior Research Fellow at the NATO Association of Canada. Yan was a foreign correspondent at The Economist.

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