VIEs’ Grey Zone Darkens

VARIABLE INTEREST ENTITIES (VIEs) have always existed in a grey area between legal and illegal.

It has been a happy ambiguity for Chinese companies wanting to skirt the restrictions on foreign ownership and for authorities when they wanted Chinese companies to acquire foreign capital and access to foreign, particularly US technology.

Now priorities have changed. Decoupling from foreign capital markets is the order of the day and the sensitivity that foreign ownership could result in the disclosure or compromise of mass Chinese user data has become acute, perhaps on it-takes-one-to-know one grounds. Thus new rules are being prepared to control tightly which companies can use the VIE governance structure to list on overseas markets and thus end up with foreign shareholders.

While that has been known for some months, the new information emerging is that the mechanism will be a blacklist, which can be played administratively like a concertina. As we noted earlier, the restrictions are likely to vary in intensity by sector. VIEs will be out of reach for any startup that collects data, which means all of them. A national security provision will provide a catch-all for regulators.

Given the political and economic incentives available to force domestic technology firms to list within Beijing’s jurisdiction (including Hong Kong), if there is any surprise, it is that authorities feel the need to take coercive powers. The slights and rebuffs they received earlier touched a nerve.

Existing VIEs will likely be left untouched, if not alone. Tech giants like Alibaba and Tencent that used them but are being reined in by other means.

Nor will VIEs move out of their grey zone status by being banned. They will remain an option for Chinese companies wanting to raise foreign capital where and when that is deemed in China’s national interests.

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One response to “VIEs’ Grey Zone Darkens

  1. Pingback: China Continues To Welcome Foreign Capital But On Beijing’s Terms | China Bystander

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