Shenzhen has been developing a regulatory framework for prepaid consumer services. In beauty salons, gyms and education and training businesses, paying first and receiving services later has become commonplace. It offers consumers discounts and convenience and gives businesses a stable customer base. But a persistent practical question remains. If a business runs into financial trouble, closes down or disappears, what happens to the money consumers have already paid?
On the surface, this concerns consumer rights. At a deeper level, it begins with the nature of the funds themselves.
When a consumer pays several thousand yuan for beauty treatments or an annual gym membership, the services have not yet been delivered. The business has received cash, but it has also taken on an obligation to provide services in the future. That money is therefore not quite the same as ordinary revenue from a completed transaction.
Prepayments are highly attractive to businesses. They turn future income into cash available today, which can pay rent, wages and other operating expenses or support expansion. Consumers effectively provide funding at very low cost, sometimes close to interest-free. Prepayments also secure customer loyalty, and some customers will inevitably leave part of the services they have purchased unused.
None of these mechanisms is necessarily problematic in itself. The real risk arises when a business becomes increasingly dependent on new prepayments to sustain its current operations. If money from new customers continually pays for services owed to existing customers, everyday expenses or new branches, the business may appear to be operating normally while its cash flow becomes ever more dependent on fresh prepayments. Once new customer numbers fall, the chain can break very quickly.
The central question for prepaid consumer regulation is therefore not merely whether customers should have a cooling-off period of a few days. It is how much control a business should have over prepaid funds once it receives them.
The clearest example of this problem on a larger scale is housing pre-sales.
Property development is obviously different from beauty treatments or gym memberships. Yet they share a common structure. Consumers pay before the goods or services are completed. Housing involves far larger sums and a longer period before delivery, magnifying the risks.
China recognised the special nature of housing pre-sale funds early on. The Urban Real Estate Administration Law of 1994 already required proceeds from housing pre-sales to be used for the relevant construction project. The Measures for the Administration of Urban Commercial Housing Pre-sales, introduced that same year, further established the regulatory foundations. Local authorities subsequently developed dedicated accounts for supervising pre-sale funds. Around 2022, national rules were strengthened further, requiring purchase payments to enter supervised accounts and safeguarding the funds needed for construction and delivery.
One point here is easily misunderstood.
A supervised account does not mean that buyers’ money remains frozen until the homes are completed and is only then handed to the developer. China’s system allows the funds to be used for the same project in accordance with the rules and construction progress, including payments for building work and materials. The central purpose is to restrict how the money is used, preventing developers from freely taking purchase payments out of one project to fund another project or other business activities.
This arrangement has clear economic value. Buyers’ funds can help finance construction, improve the turnover of development capital and reduce developers’ reliance on their own capital and bank loans. During a period of rapid property expansion, this model can support faster development and higher capital turnover.
But it also creates another problem.
Even if all payments enter supervised accounts and none is misappropriated, completion is not guaranteed. Construction costs may rise, financing may stop, builders may encounter difficulties, or the developer itself may enter financial distress. Since money in the supervised account is spent progressively as construction advances, a crisis halfway through the project may leave insufficient funds in the account to finish it.
Supervised accounts can therefore reduce the risk of diversion without eliminating the development risks inherent in the project.
Australia, particularly New South Wales, takes a distinctly different approach to allocating risk in off-the-plan transactions.
In NSW, the buyer’s deposit, together with relevant advance payments under the contract, generally needs to remain in a regulated trust account or controlled money account before settlement and cannot be released early to the developer. In other words, developers cannot directly use buyers’ deposits to purchase materials, pay construction costs or support other projects.
Developers must therefore fund construction primarily through their own capital and development finance from banks and other professional financial institutions. Although buyers have signed contracts and paid deposits, they do not, in principle, become direct financiers of construction as a result.
Another distinction matters here. These funds are not entirely idle within the economy as a whole.
They remain in banks and within the regulated trust-account system. The accounts may earn interest, and banks use deposit funding within their own balance-sheet arrangements. What is restricted is the developer’s direct control over the money.
More precisely, the NSW system does not sacrifice the economy-wide use of funds. It limits developers’ ability to finance their projects directly with buyers’ advance payments.
This distinction is important.
Saying simply that Australia locks money away in exchange for safety makes the choice look like one between efficiency and idle funds. In fact, the system reallocates the financing function. Development still needs funding, but more of it comes from developers’ own capital and professional financial institutions rather than directly from ordinary buyers’ deposits.
The allocation of risk changes accordingly.
Before providing development finance, a bank assesses the project, the developer’s financial position, the proportion of homes pre-sold, construction costs and collateral. Banks can certainly make mistakes. But assessing and pricing risk is part of their professional role, and they manage it through interest rates, lending conditions, security and capital requirements.
Ordinary buyers are in a different position. Their purpose is usually to obtain a home or invest in property, rather than to finance a developer’s project. They lack a bank’s capacity to analyse risk, and they do not receive a corresponding financing return for taking on development risk.
Seen this way, the difference between the Chinese and Australian arrangements goes beyond regulatory technique. They offer different answers to the question of who should bear the risks of financing development.
China’s traditional pre-sale system puts buyers’ payments to work during construction, improving developers’ capital efficiency and lowering financing barriers. But it also exposes consumers to project risk earlier. The NSW model limits developers’ access to buyers’ advance funds, leaving more financing responsibility with developers and financial institutions. It may increase financing costs, but it strengthens the separation between consumers’ money and development risk.
This is not a simple question of one system being absolutely superior. It reflects different institutional choices about efficiency, safety and risk allocation.
Once we understand housing pre-sales, the issues surrounding ordinary prepaid services at beauty salons, gyms and training providers become clearer.
A consumer who pays several thousand or even tens of thousands of yuan for services over the next year or two intends to buy services, not to lend operating capital to a business. Yet if the business can immediately use that payment as it wishes, the consumer has effectively become an unsecured provider of funding.
More importantly, consumers generally receive no rights commensurate with that risk.
They cannot see the business’s balance sheet, do not know its cash-flow position and cannot tell whether their money is being used to open the next branch. If the business becomes insolvent, their ability to recover the funds is usually very limited.
This is the aspect of prepaid consumer arrangements that most deserves reconsideration.
Regulation cannot simply require all prepayments to be frozen. Setting up complex third-party custody arrangements for short-term services costing a few dozen or a few hundred yuan could cost more than the protection is worth and seriously reduce the efficiency of ordinary commercial activity.
A more reasonable approach is regulation proportionate to risk.
The larger the payment, the longer the period before services are delivered and the greater a business’s dependence on prepayments, the greater the financing risk consumers actually bear. Supervision of the funds should become correspondingly stricter. Depending on the circumstances, measures could include limits on prepaid amounts and periods, dedicated accounts, the release of funds as services are delivered, performance insurance or other guarantees, rather than imposing identical rules on every industry.
This is the real lesson offered by housing pre-sale regulation.
The purpose is not to stop money flowing. It is to determine who may use the money, under what conditions and who ultimately bears the risks created by its use.
Paying in advance should not automatically mean that consumers must also assume a business’s operating risk. In principle, the earlier a business gains access to funds, the larger the amount and the longer it holds them, the stronger its responsibility for safeguarding those funds should be.
Shenzhen’s work on prepaid consumer regulation, China’s supervision of housing pre-sale funds and NSW’s trust arrangements for off-the-plan purchases appear to concern different sectors. Beneath them lies the same question of how to establish boundaries between the efficient use of money and the protection of funds.
Pursuing safety alone can reduce the productive use of funds. Pursuing efficiency alone can transfer risks that should be borne by businesses and professional financial institutions to ordinary consumers.
Mature regulation does more than choose between efficiency and safety. It allows funds to keep serving an economic purpose while leaving risk with those best able to identify, manage and bear it.
That may be the principle most worth defending in any system of prepayments.
Discover more from Geoffrey Chen
Subscribe to get the latest posts sent to your email.