Deflate sharing-economy bubbles to avert wider risk in China

By Hu Weijia Source:Global Times Published: 2017/12/24 21:33:39

With a surge in bankruptcies in the so-called sharing economy, avoiding further inflation of bubbles should be a major theme of China's economic policies next year.

This year was an excellent one for start-ups in China's sharing economy, with companies specializing in bicycles, autos, umbrellas and more all taking part in the hype. But after the concept reached fever pitch, the sector became overheated and stalled as a result of overinvestment. According to incomplete statistics, nearly 20 companies in the sharing economy declared bankruptcy in China over the past year.

Their woes helped squeeze bubbles out of China's sharing economy, but brought pain to society and the real economy. For instance, with more and more bike-sharing companies going bankrupt, regulators have had to turn their focus to the security of deposits bike users pay to open accounts.

The bike-sharing services reportedly received billions of dollars in venture funding, creating a cash-burning and ride-subsidizing business model.

A wave of bankruptcies in the capital-intensive industry may have a knock-on effect on the country's financial system.

As part of China's bid to upgrade its economy, innovations and start-ups are buzzing with new ideas and products. Although some business models don't seem to offer any prospect of profitability, they can probably win the favor of venture capitalists if they can identify themselves with new concepts like the sharing economy, the Internet of Things and the Internet economy.

To some extent, overinvestment in those emerging industries and the subsequent economic bubbles have become one of the biggest economic problems that China will face in 2018.

The artificial intelligence (AI) industry may be the next sector to witness a surge in bankruptcies.

From the technology giants down to little-known second- and third-tier players, many Chinese companies are increasing their AI investment to stay competitive in the burgeoning industry.

China already rivals the US in some segments of AI, but low-efficiency investment should be a source of concern. The Chinese economy may soon feel the effects if a large number of AI companies are driven out of the market due to their low profitability.

It will be difficult to assess the impact and risks on the Chinese economy if we allow economic bubbles to further inflate.

One method that can be used to avoid overinvestment in emerging industries is to stop the worship of "hot concepts" and focus on profitability.

The author is a reporter with the Global Times.


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