China’s economic mess might be much bigger and shocking than what we imagine. Over the recent past, several of Chinese corporate lies and scams have come out in the open. But the latest revelation surrounding a former Chinese tech unicorn has emerged as, by far, the biggest corporate shock coming from China till date.
We are talking about the Beijing-based car website start-up Renrenche. It used to be one of the most exciting Chinese tech unicorns and was backed by investors like Goldman Sachs Group Inc. and Tencent Holdings Ltd. In 2018, Renrenche had a pre-money valuation of $1.4 billion. But as per a Bloomberg report, people familiar with the matter say that Renrenche website now has a preliminary assets sale plan to 58.com Inc., a Beijing-based online classified ad leader, for merely HK$10,000, which is equivalent to $1,290.
Bloomberg has further reported that people familiar with the development have also said that 58.com Inc. will take over Renrenche’s Hong Kong entity and offer a $4 million loan for the Beijing-based car website’s mainland China operations. However, there is no official word yet on the latest development. The people quoted by Bloomberg said that the parties are yet to finalise the deal and may not go ahead with it.
The Beijing-based car website, Renrenche has however literally gone from riches to rags. But what does it tell about China’s business climate and economic mess? Firstly, the Renrenche episode once again exposes China’s tendency to intentionally or unintentionally overvalue its start-ups which often ends up arousing misguided investor sentiment.
And secondly, it shows how China’s economy is getting ravaged, even as start-ups, which were once being flaunted by the paper dragon, start losing steam.
Renrenche is not any other start-up. It was backed by some major Chinese tech giants, including Tencent and Didi Chuxing, a Chinese vehicle-for-hire company. Moreover, venture firms like Shunwei Capital and Redpoint China were also rallying behind the Beijing-based car website. Such was the sentiment behind Renrenche that according to a statement by the company, it completed a $300 million investment round led by the New York-based investment banking company Goldman Sachs in 2018.
But Renrenche is now facing tough competition from rivals, including Uxin Ltd. and Softbank Vision Fund-backed Guazi.com. Even more importantly, the Wuhan Coronavirus Pandemic has demolished the Chinese economy and funding for the Beijing-based car website startup has therefore dried up.
According to Bloomberg, one of Renrenche’s creditors Argyle Street Management Ltd. is also seeking a winding-up order against the startup company. The creditor claims that the company has failed to pay back $15 million in debts.
Renrenche’s crash is rather dramatic and if a deal at around $1,000 is actually struck then it would go down in the history as one of the most embarrassing start-up failures for China. But this isn’t really for the first time that Chinese corporates have left Beijing red-faced.
Even recently, Kingold Jewelry Inc, China’s largest privately-owned gold processing and jewellery company, took a loan of more than 20 billion Yuan, that is 2.8 billion dollars, with pure gold as collateral. But when the company defaulted in repayment, it was found that what the company claimed to be pure gold was actually gilded copper. The Kingold episode went down as the biggest gold scam in human history.
Similarly, another popular Chinese corporate firm, Luckin Coffee, a rip-off of Starbucks was found to have inflated the details of its sales to perform better when its US IPO was released.
These instances erode global confidence in Chinese corporate climate. China may openly flaunt a start-up and compel the world to invest, only to find out that the start-up has flopped miserably later on. Moreover, it is also becoming clear that China is hiding its post-pandemic economic mess.
The Bloomberg report on Renrenche proves how Chinese companies and start-ups are finding it hard to sustain themselves in face of the Coronavirus-induced economic slowdown. The Renrenche episode has therefore exposed the paper dragon’s precarious economic position.