(Robin) Hui Huang (et al.), a law professor at the Chinese University of Hong Kong’s Faculty of Law has produced a timely update on where China currently stands on Variable Interest Entity (VIE) structures.
We’re reminded these arrangements (where ‘foreigners’ get to participate and invest in ‘in theory’ no go economic areas) have been around for a long time. The first was SINA in 2000 and since then we’ve had many more. China though has never clarified the legality of these arrangements and a debate about their safety from an investor perspective, that’s been going on since the SINA deal, has recently heated up.
The paper goes through the history of VIEs and jurisprudence to make the point that although these things have never been formally approved there’s a lot of law and precedent which supports and validates their ongoing use. Law courts in China have dealt with VIEs on many occasions and their existence has never been a point of contention.
The paper argues that it’s a conscious policy of ‘Strategic Ambiguity’ on the part of the Chinese authorities that prevents greater clarity. The authorities are of course aware this isn’t to the liking of many but it’s a way to thread the needle of getting risk capital into China whilst at the same time making sure the National Interest is always protected.
The arrangement is, in fact, a bargain both sides have benefited from historically and for this reason there’s no reason to expect it to be dismantled or materially altered. Moreover, the fact these things have been around for over 25-years, and have served a useful purpose throughout, suggests they’ll be around for a long time to come.
I liked the summary of foreigner’s frustration pushing for greater clarity with the reminder that “..you can’t wake a person who is pretending to be asleep.” i.e. the Chinese regulatory apparatus.
My own two pennyworth is to note these things are gradually being phased out as China’s domestic capital markets are deepening and controls in many industry sectors are being loosened. So, perhaps fewer VIEs in future but the ones in place will stay and the Strategic Ambiguity will persist. It is feature not a bug of the program.
There’s more detail and useful color in the paper which you can access via this link The Legality of the VIE Structure in Overseas Listings of Chinese Companies.
Happy Sunday.