Why Would Xiang Hu Bao Have Collapsed Even Without External Pressure? Why Did Shutting It Down Save Alipay?

Even without an external demand to shut it down, Xiang Hu Bao was bound to collapse under its own weight. That is because it made mistakes that are almost impossible to remedy. Let me analyze this below.

First, Let Us Correct a Misconception: China Does Not Actually Have Many True Mutual Aid Users

What is a true mutual aid user? Simple: someone willing to keep paying money over the long term to take part in mutual aid cost-sharing.

Have you ever seen an internet product where users pay twice a month for an intangible, imperceptible good?

Many people, upon learning about mutual aid, think the idea is excellent; since registration is free, they register — but when it actually comes to paying, they quit. Especially as the amount they have to pay keeps growing.

Look at a platform that spent heavily to acquire users in its early days: its user count today is less than one tenth of its peak. KangAi Commune has done well at retaining users, relying entirely on word of mouth and on building local contacts, and about one third stay.

So of Alipay's 100 million users, how many understood their obligations and rights, knew the deduction rules, or had read the terms? The vast majority had not. Even being generous, no more than 20 percent — twenty million — would ultimately have stayed.

The reason you think mutual aid users are easy to acquire is usually that you understand insurance and protection — you may work in insurance or in the industry. That is survivorship bias.

Some say this is fine: rope in the users first, then wash out the uncommitted and keep the real ones. Most successful internet products do exactly this. But mutual aid differs from other internet products: healthy people — those who in the short term do not look like they will need to claim — will leave, while the unhealthy, who are very likely to claim, will stay. In other words, the two groups do not exit at the same rate. What leaves is an asset; what stays is a liability.

A user's contribution = total mutual aid claims / number of contributing participants. If the denominator falls by a smaller proportion than the numerator, the contribution rockets upward. More users then quit, and so it enters a vicious cycle that is very hard to reverse. In this situation users will keep dwindling. Alipay's data in the period before the shutdown already revealed the problem.

Second, Two and a Half Serious Flaws in Xiang Hu Bao's Rules

The first: a three-month waiting period. Unlike insurance, where the first premium is paid up front, joining mutual aid requires no money in advance, so for some people it naturally creates opportunistic behavior — they join, wait three months, and then apply. KangAi Commune began with six months, then, after observing the results, decided this was not workable and extended it to twelve months, longer than insurance.

The second: no review deposit required. If it is free, then anyone is willing to come and apply — opportunistic and irresponsible applications — which exhausts the company's resources; and one can be certain that a proportion of those applications will pass review, which in turn drives up contributions. KangAi Commune requires a review deposit after an application passes initial screening, which is forfeited if the applicant is proven to have committed fraud or concealment. This raises the threshold for submitting a claim and makes applicants consider their application much more carefully.

The second-and-a-half: too tight an integration with the Alipay account. Registration and the deduction and automatic debiting of contributions were all too convenient, which meant users did not dig into how mutual aid works before joining — a hidden danger for the future.

These two and a half flaws were not yet fatal; after all, the covenant could be amended, old and new members separated, and the chain extended to patch things up. But once combined with the next problem, it becomes very hard to save.

Finally, the Fatal Compounding Mistake: Explosive Growth

If the user base is small, all of the above problems can be solved: patch the flaws, then grow a sufficient number of new users to smooth over what the rule gaps caused. If, for example, the platform had realized the problem at 10 million users and fixed it, then added another 20 million, those issues could have been smoothed out. But trying to fix things at 100 million users would require adding 200 million more to flatten the curves — the difficulty is easy to imagine. As my first section showed, without compulsion it is impossible for China to have 300 million people willing to have money deducted every month to take part in mutual aid.

That is why, in my earlier piece imagining that I ran Xiang Hu Bao, I put "control the speed" first. Yu'ebao can grow explosively; Xiang Hu Bao cannot. Even if someone who knows nothing about money market funds or wealth management is lured into joining, seeing their balance rise every day will not make them resent Yu'ebao. But in Xiang Hu Bao, what people see is their monthly balance falling! That is the difference between heaven and earth.

We Can Foresee What Problems Xiang Hu Bao Would Have Faced If It Had Kept Running

1. Contributions would have soared, large numbers of people would have quit, and the user count would have plunged as fast as it had grown.

2. Large numbers of departing users would demand that Xiang Hu Bao compensate them for the money they had paid in.

3. Many people would file complaints with the industry and commerce bureau, the tax bureau, the police, the banking regulator, the central bank and everyone else, on grounds such as being defrauded, having their accounts mysteriously debited, illegal fundraising or unlicensed operation.

4. A flood of mutual aid claims would have poured in, some of them fraudulent and successful.

5. Large numbers of people whose claims were rejected would post and make videos declaring that Alipay is a swindler — and the emotions of this group run very high.

6. A large number of lawsuits against Xiang Hu Bao and Alipay would have followed.

7. The targets of complaint would not have been limited to Xiang Hu Bao; Alipay, Ant Group and even the Alibaba Group would have been drawn in, Alipay's credibility and public image would have suffered, and Ant's listing would have been affected.

8. With such high operating costs, the 8 percent fee would no longer have been sustainable and would have been raised to 12 percent.

9. The cost of shutting down a mutual aid platform keeps rising year by year until it becomes a hot, trash-like potato you cannot get rid of.

So I say that the regulators' shutting down of Xiang Hu Bao saved it, and accelerated Ant's path back to listing. By the time the problems exploded and public anger peaked, an Ant listing would have been far harder. Xiang Hu Bao stepped down from the horse as it reached the slope; it reportedly lost money, but it was well worth it, and once listed Ant should send the regulators a silk banner. Only one question remains: who bore the consequences of the shutdown?

In the early days, various platforms claimed to have acquired tens of millions or hundreds of millions of users in an extremely short time. I always found this laughable; I wrote at least five pieces on the subject in the community, urging users and platforms to view users correctly, but my voice was too small to be heard.