Shein’s U.S. buyout hits a political wall, as China’s fintech lenders face ruin

“There’s been a very definite trend of what I would call re-transferring part of the economy from the private sector to the state sector.” — on Beijing’s regulatory retreat from private consumer finance back toward state dominance

By Rene Vanguestaine and Doug Young

Two vastly different segments of Chinese business are facing deep regulatory skepticism this month, one abroad and the other at home. Fast-fashion phenomenon Shein (0625.HK) has found its planned purchase of U.S. clothing label Everlane getting snagged in an improbable national security review in Washington. Meantime, China’s remaining cohort of private fintech lenders is getting plunged deeper into crisis following a multibillion-dollar fraud case. Together, these developments highlight how swift political tides can unravel business models on both sides of the Pacific.

Things have never been smooth for Shein outside its core fast-fashion business. The apparel powerhouse long served as a lightning rod for criticism over questionable labor practices, environmental complaints, and its aggressive use of customs loopholes to dodge U.S. and European import tariffs — concerns that scuttled its initial plans for a U.S. IPO roughly three years ago.

Now, Shein’s $80 million bid to acquire Everlane is undergoing scrutiny by U.S. national security regulators. The deal raised eyebrows from the moment it was announced, given that Everlane built its brand identity on corporate responsibility, environmental sustainability and ethical supply chains. Yet it’s nearly impossible to argue that Shein’s acquisition of an activewear and basic apparel brand threatens U.S. national security.

Instead, the pushback looks to have originated from within. When businesses lean heavily into environmental and worker protections, their workforces tend to care deeply about those standards. There are plenty of documented cases where corporate staff revolted against leadership — perhaps most famously when employees at Google rebelled against management over contracts with the U.S. Department of Defense. We think it’s likely that Everlane employees, alarmed by Shein’s labor and environmental record, agitated and persuaded unions or sympathetic regulators to intervene.

Beyond internal discontent, this review is another pawn in an escalating tit-for-tat between Washington and Beijing over cross-border deals. We don’t necessarily view this as the start of a trend, but it’s bound to ratchet up tensions. While national security remains a valid hurdle in advanced technology, regulators increasingly cite it as cover for economic protectionism and job defense. We’re observing similar resistance across Europe: France has long resisted foreign acquisitions, while Germany has steadily hardened its stance over the past two years, exacerbated by Beijing’s perceived diplomatic support for Russia in Ukraine.

A grim reckoning for China’s fintech pioneers

Meanwhile back in China, an entire private industry is falling apart. China’s private online lenders were once high-flying market darlings, but their latest quarterly reports look outright scary, marked by steep declines in top-line revenue and cratering profits.

Investor sentiment soured further after CreditEase (YRD.US) suspended principal and interest payments on $4.4 billion worth of wealth management products in May in a suspected fraud case. Although wealth management operated alongside consumer credit, an alleged fraud of that scale is staggering, and it seems to have triggered fresh regulatory crackdowns on China’s beleaguered fintech lenders.

This clampdown reflects a broader, decade-long reassertion of state control over the Chinese economy. While policymakers in Beijing acknowledge they need private enterprise to foster development of advanced technology, they’ve increasingly decided they don’t need private players in retail finance. The lending sector has shrunk from roughly 4,000 active platforms during its peak between 2017 and 2019 to fewer than 100 today.

These platforms originally boomed because state-owned banks preferred safe, guaranteed returns lending to state-owned enterprises rather than doing the hard work of assessing consumer credit risk. But as private platforms flourished — charging all-in fees and borrowing costs that frequently topped 30% to 35% — state banks pushed back. State lenders resented that private fintech upstarts operated without mandatory capital reserve cushions and grew envious of their immense profits.

Regulators stepped in, repeatedly lowering caps on permissible interest rates and service charges. A further tightening late last year and earlier this year made it nearly impossible for these companies to turn a meaningful profit. Compounding their misery, China’s sluggish consumer economy has prompted shoppers to curtail spending and rein in debt. We think investors should stay away from these names. While a tiny handful might survive, picking the rare survivor from this wreckage is a risk not worth taking.

About China Inc

China Inc by Bamboo Works discusses the latest developments on Chinese companies listed in Hong Kong and the United States to drive informed decision-making for investors and others interested in this dynamic group of companies.

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