As financial difficulties worsen for Danke, Chinese authorities are intervening to hold the formerly thriving apartment rental and sharing company responsible for its actions.

Over the past few weeks, property owners who hadn't received payments from Danke, which operates as a subleaser, have begun evicting renters. Following numerous local news reports detailing the company’s substantial debt – estimated to be as much as $520 million – a Shanghai district court added Ziwutong Beijing Asset Management, Danke’s parent company, to the nation’s “social credit” blacklist.

China’s social credit system comprises a series of measures designed to enhance the enforcement of existing regulations, and those found in violation can encounter limitations in their everyday lives. In Danke’s situation, the company’s founder and CEO, Gao Jing, is now prohibited from “high-consumption” behaviors. This includes restrictions on activities such as flying in first class, traveling by high-speed rail, purchasing property, taking vacations, and even enrolling children in costly private schools, as stated in a court announcement.

This action followed a statement from a senior judge at China’s Supreme People’s Court, indicating that Danke was being investigated by relevant authorities regarding its cash-flow issues.

Established in 2015 and supported by prominent investors including Ant Financial, Tiger Global, and Derek Shen, the former head of LinkedIn China, Danke aimed to provide affordable and comfortable housing for China’s professional workforce. However, its growth has been driven by aggressive expansion financed through significant debt.

Rather than employing a conventional rental approach, Danke utilizes a complex financial arrangement to manage its cash flow. Tenants are incentivized with lower prices to pay a year’s rent in advance and are encouraged to secure loans to cover these costs, provided by banks partnering with Danke. Renters who decline to take out these loans are typically required to pay a higher rental rate.

Using the funds obtained from these loans, Danke then compensates homeowners, but typically on a monthly or quarterly schedule. This structure provides the startup with considerable financial flexibility, allowing it to lease properties from landlords and invest in apartment renovations, which are then sublet to tenants at a profit.

Danke’s business model embodies the potential of internet platforms and the “sharing economy” – characterized by minimal asset ownership and rapid growth – but it also introduces substantial risks for both the suppliers and consumers it intends to benefit. The onset of the COVID-19 pandemic led to a slowdown in China’s rental market, placing strain on Danke’s financial structure.

Last year, when TechCrunch interviewed Danke’s angel investor and chairman, Derek Shen, about the company’s financial vulnerabilities, he commented: “The financial instrument itself isn’t flawed. The core problem arises when the housing operator encounters difficulties with repayment, so ensuring the business operates effectively is crucial.”

An editorial published in the state-run China Daily asserted, “More stringent market oversight is necessary to prevent similar situations in the future.” It continued, “The inclusion of banks and loans has amplified the risks involved. Considering the unsustainable nature of Danke’s business model, financial regulatory bodies should contemplate implementing stricter financial regulations to prohibit such precarious practices.”

Danke, which is listed in New York, experienced a dramatic decline in its share price, falling to $2 last month from a peak of $13.5 when it initially went public in January. To date this year, the company has only released its first-quarter earnings report, which revealed a net loss of $174.3 million.

The financial instability also draws attention to WeBank, a major banking partner of Danke, and its involvement in a highly leveraged rental business in exchange for substantial interest payments. The Tencent-backed internet bank announced on social media that it would transfer loan obligations from tenants to Danke, which has already been providing financial assistance to renters to cover their loan interest payments to WeBank. During the three months ending in March, Danke paid a total of $7.9 million in interest related to “rent financing.”

Danke has not yet responded to requests for comment regarding this situation.