Jia Yueting, LeEco founder, gestures as he unveils an all-electric battery "concept" car called LeSEE during a ceremony in Beijing, China April 20, 2016. Damir Sagol | Reuters

When a Chinese tech company with global ambitions began to run short of cash last year, it sought billions of dollars from new investors. One of them was a music teacher. Li Shenghong, who teaches out of a mall storefront in southern China, was already a fan of the smartphones and televisions sold by the company, an internet-and-gadgets conglomerate called LeEco. When LeEco also began selling investment products online, Mr. Li snapped them up, even though the company said little about where the money would go. "Whenever I have leftover money from my salary, I'll invest it," Mr. Li said, explaining that he had invested $7,000 in the company. "My spare change? I put it in." LeEco, buffeted by rapid expansion, has turned to murky and potentially risky ways to stay afloat, including tapping China's shadowy informal banking system, which many people believe threatens the Chinese economy. The company courted small investors by promising good rates of return and playing down risks. More from The New York Times:

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Looking for a new job? These free apps can help All the while, its finances were deteriorating. Even as it continued to raise money, LeEco filled the lobby of its offices with potted plants to keep angry creditors from loitering there.

Moody's downgrade

Economists worry that Chinese companies are borrowing too much money outside the scrutiny of regulators and planting too many potential debt bombs in the corners of China's financial system. On May 24, Moody's Investors Service lowered its China rating, citing the country's mounting corporate debt. China is taking steps to address the issue. President Xi Jinping told top ministers in April to stabilize the country's financial system. Still, solving the debt problem could require drastic action. "The problems are real, but manageable," said Arthur R. Kroeber, the head of research at Gavekal Dragonomics, an economic research firm based in Beijing. "The government needs to start managing them." LeEco, a catchall name for a variety of businesses controlled by the internet tycoon Jia Yueting, poses little threat by itself to China's financial system. But a review of the company's finances shows the extent of the opaque ways Chinese firms can use to raise money — and how failures could ripple through the system. A spokeswoman said LeEco's efforts to raise money complied with the law. Mr. Jia declined requests for an interview. LeEco began as an online video-streaming company sometimes called the Netflix of China. Today, its many affiliates sell smartphones and TVs, buy up sports programming, peddle financial products and back the Faraday Future electric car business, which is based in Los Angeles and employs 1,400 people. To borrow more than $2.1 billion since the start of last year, LeEco affiliates have turned to China's vast but poorly understood informal financial system. LeEco raised $215 million from selling so-called wealth management products online, according to public data. In China, such investments promise a good rate of return and the illusion of a guarantee, but they offer little disclosure. LeEco listed the products on its app as "low risk." Mr. Li, the music teacher, bought LeEco wealth management products that promised an annualized return of up to 7 percent. He is not concerned about getting his money back. "I'm not too interested in where the money is going," he said. "I have a Le TV and a Le phone. I'm not worried."

People purchase iPhones at an Apple store in Beijing, China. Li Sanxian | VCG | Getty Images

LeEco also tapped securities brokerages for money, another murky transaction. Under such deals, the brokerages lend money if a borrower puts up shares as collateral. Those loans stay off the books of the formal banking system, making risks difficult to track. They can also sour quickly if shares plunge in value, a real possibility in China's stock market. According to the latest available data, Mr. Jia has pledged 97 percent of his shares in LeEco's main publicly traded arm, Leshi Internet, to back loans primarily from securities brokerages. In November, those loans totaled $1.7 billion.

Less scrutiny

Venturing into other corners of China's financial system, LeEco has raised $2.4 billion since last year by selling shares or debt convertible into shares in its various privately owned affiliates. Because those businesses are not publicly traded, they get less scrutiny from Chinese securities regulators than companies that sell shares on a public stock market.

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LeEco says it sold those stakes only to institutional investors who would be aware of the risks. But public records show shares in the nonpublic businesses have ended up in the hands of a number of smaller investors. Many were lured by the idea of getting in early — a real desire in start-up-mad China — and Mr. Jia's promise that he or his investment vehicles would buy back the shares at a generous rate of return if the businesses did not go public. Mo Lingmei was among nearly 400 people to buy stakes in Le Sports, a LeEco affiliate that acquires sports broadcasting rights such as the right to show Premier League soccer online in China. Ms. Mo, who sells clothes online, said she drained her family's savings to come up with half of the $300,000 that a group of friends pooled together to invest in the company's $1.2 billion funding round last year. "It was an impulse decision," she said, adding that Mr. Jia "was so hot at the time, on TV, in the media, in the paper. I'd never invested in anything before." Many of the company's problems have lingered. Last month, LeEco laid off 325 workers in the United States. Some affiliates have started new fund-raising efforts. In April, 37 representatives of small suppliers demanded that they be repaid $10 million owed to them by a LeEco affiliate. They staged a weeklong sit-in in the lobby of LeEco's office tower in Beijing, until large potted plants were placed in the sitting area. At LeEco's ride-sharing affiliate, Yidao Yongche, drivers have had trouble getting paid for weeks and have started protesting at several of the company's offices across China.

Layoffs and recovery