Chinese Variable Interest Entities #Shorts

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#Shorts
What Are Chinese Variable Interest Entities? VIE
Chinese companies seeking capital often go to the U.S. stock market to tap its deep-pocketed investors, bringing in more than $100 billion through first-time share sales over the past twenty years. This money flow was immensely profitable for all involved: The founders, the bankers, early investors and new shareholders. Yet all this now looks set to change. China has pledged to write new rules for companies going public outside the mainland and to step up oversight of those already trading offshore. It’s unclear whether Didi Global Inc.’s contentious initial public offering in June was the catalyst; the U.S. has been taking steps to force some Chinese firms to open their books or face delisting, and now has blocked new public offerings. Either way it’s a major shakeup for Chinese companies -- which account for about 4% of America’s $50 trillion equity market -- as well as their private equity backers and Wall Street.

The Cyberspace Administration of China, the country’s internet regulator, has put forth strict new rules on overseas listings. Companies with data on at least 1 million people will be required to undergo a cybersecurity review before they can conduct an IPO abroad. The review will also look into potential national security risks from such IPOs. The regulator is seeking feedback before the rules are implemented. Regulators are also said to be considering requiring firms that have already gone public using the variable interest entity structure to seek approval for additional share offerings overseas. (A VIE creates a foreign shell company incorporated in places like Cayman Islands or the British Virgin Islands -- ostensibly outside the purview of Chinese regulators.) This would impact firms such as Alibaba Group Holding Ltd.

China already has strict rules on foreign investment in certain industries such as internet companies, banks, miners and private education firms. VIEs were a legally shaky workaround that enabled Chinese firms to get capital from foreign markets without giving away control. Some Chinese tech firms do have foreign backers. Softbank and Uber Inc. for instance hold sizable stakes in Didi, while Naspers Ltd. has a 29% stake in Tencent Holdings Ltd., making it the single biggest shareholder. The latest move by China’s Communist Party is aimed at ensuring sensitive data controlled by companies can’t be accessed by foreign regulators. More broadly, it’s part of campaign to impose stricter controls over the nation’s technology firms, many of which have near-monopolies in their fields and vast pools of user data -- the new oil of the digital economy.


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