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'Crackdown on US listings: Will China close $1.6tn VIE loophole?'

'Crackdown on US listings: Will China close $1.6tn VIE loophole?'
'Crackdown on US listings: Will China close $1.6tn VIE loophole?'
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VIEs
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VIEs
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VIEs

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BIG IDEA | ‘If Chinese authorities start to question “Variable interest entities”(VIEs),  amid the crackdown that has already battered ride-hailing company Didi Global -- another VIE user -- the resulting loss of investor trust could send shock waves through global financial markets.’

‘ “Variable interest entities”(VIEs), a method used by top Chinese companies to offer shares in the U.S. while skirting restrictions on foreign listings, risks coming into regulators' crosshairs as Beijing ramps up oversight.’

  • ‘But the method is in a legal gray area. If Chinese authorities start to question it amid the crackdown that has already battered ride-hailing company Didi Global -- another VIE user -- the resulting loss of investor trust could send shock waves through global financial markets.’

‘Variable interest entities are used by businesses in sectors where China limits foreign ownership, including telecommunications and education, to let foreign investors buy in through shell companies based in jurisdictions such as the Cayman Islands.’

  • ‘U.S. listings of Chinese companies using VIEs -- which include such big names as Alibaba Group Holding, Pinduoduo and JD.com -- are worth a total of $1.62 trillion.’

‘Typically, VIE listings involve a U.S.-listed shell company registered in the Caymans signing contracts through a China-based subsidiary with the Chinese enterprise actually running the operations.’

  • ‘These in effect grant the Caymans company control over the business and a claim on its profits even without direct ownership.’
  • ‘The contracts give the Caymans-based holding company control of the operating enterprises and allow their profits to flow to it as well.’
  • ‘This allows overseas investors to become de facto shareholders in the Chinese company.’

‘Alibaba, for example, set up Alibaba Group Holding as a Caymans-based shell company to go public in New York.’

  • ‘The holding company established foreign-owned subsidiaries in China, which inked contractual control agreements with the enterprises handling Alibaba's e-retail and other operations, and with their shareholders, turning the companies into variable interest entities.’

‘Rules set by China in 1994 require companies to get approval from the State Council to list on foreign stock markets.’

  • ‘But these assume that the company issuing the shares is based in China, and do not consider the possibility of listing through an overseas shell company.

‘The China Securities Regulatory Commission is leading the charge to change this, according to U.S. media.’

  • ‘As the government tightens restrictions on foreign listings, authorities could require businesses using VIEs to seek permission to list abroad, even via a foreign-registered holding company.’
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