Risks & Trends

by Malcolm Riddell

VIEs
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Part 3 | Revising the Rules

Bloomberg

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Matt Levine | Bloomberg
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July 22, 2021
Part 3 | Revising the Rules
Part 3 | Revising the Rules
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Matt Levine | Bloomberg

VIEs

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BIG IDEA | ‘The Chinese government could declare “all these VIE contracts are actually a disguised form of foreign ownership, which is not allowed by the rules, so they are all void and your Didi and Alibaba shares are worthless.” ’
'While virtually every major Chinese internet company has used the structure, it’s become increasingly worrisome for Beijing as it tightens its grip on technology firms that have infiltrated every corner of Chinese life and control reams of consumer data.’

‘Authorities so far have little legal recourse to prevent sensitive overseas listings, as with the recent Didi Global Inc. IPO, which went ahead despite requests for a delay from regulators.’

‘The China Securities Regulatory Commission is leading efforts to revise rules on overseas listings that have been in effect since 1994 and make no reference to companies registered in places like the Cayman Islands, said the people, asking not to be identified discussing a private matter.’

  • ‘Once amended, the rules would require firms structured using the so-called Variable Interest Entity model to seek approval before going public in Hong Kong or the U.S., the people said.’

‘The proposed change is the first indication of how Beijing plans to implement a crackdown on overseas listings flagged by the country’s State Council on last week.’

  • ‘Closer oversight would plug a gap that’s been used for two decades by technology giants from Alibaba Group Holding Ltd. to Tencent Holdings Ltd. to attract foreign capital and list offshore, potentially thwarting the ambitions of firms like ByteDance Ltd. contemplating going public outside the mainland.’

‘The additional oversight could bestow a level of legitimacy on the VIE structure that’s been a perennial worry for global investors given the shaky legal ground on which it stands.’

  • ‘If the Chinese government decides “VIEs are okay, but you have to get our permission to list them abroad,” that's not a worst-case scenario even if it never grants permission.’

‘That’s not the worst outcome. The worst outcome would be if the ones already listed abroad were just, you know, voided.’

  • ‘The Chinese government could declare “all these VIE contracts are actually a disguised form of foreign ownership, which is not allowed by the rules, so they are all void and your Didi and Alibaba shares are worthless.” ’
  • ‘That would … I mean, these VIE contracts are a disguised form of foreign ownership, and a fairly thin disguise. (It’s not like Chinese government authorities are unaware that foreign investors own shares in Alibaba; it’s just that they seem to accept this level of technical compliance with the rules.)’

‘If the PRC government otherwise finds that VIEs are in violation of any existing or future PRC laws or regulations or lack the necessary permits or licenses to operate their business, the relevant governmental authorities would have broad discretion in dealing with such violation, including, without limitation:’

  • ‘Revoking the business licenses and/or operating licenses of the PRC entities; and’
  • ‘Requiring them to restructure their ownership structure or operations, including terminating the contractual arrangements with our VIEs and deregistering the equity pledges of our VIEs, which in turn would affect their ability to consolidate, derive economic interests from, or exert effective control over our VIEs and their subsidiaries.
  • ‘This is a real risk!’

Bloomberg

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Matt Levine | Bloomberg
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VIEs
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Part 1 | 'Owning Chinese Companies Is Complicated'

‘ “Variable interest entities”(VIEs): The problem with this is that it sort of sounds like you’re kidding. But this is a standard method for mainland Chinese internet companies to go public, and the market has come to accept it.’
7/22/2021

Bloomberg

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Matt Levine | Bloomberg
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VIEs
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Part 2 | The DiDi VIE (as an example)

‘The prospectus has a diagram, above, of the corporate structure, which looks almost normal. But everything below the double arrow — the actual ride-hailing business, etc. — is slightly askew.’
7/22/2021

Bloomberg

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Matt Levine | Bloomberg
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VIEs
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Part 3 | Revising the Rules

‘The Chinese government could declare “all these VIE contracts are actually a disguised form of foreign ownership, which is not allowed by the rules, so they are all void and your Didi and Alibaba shares are worthless.” ’
7/22/2021

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Malcolm Riddell
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VIEs
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China: Signals Blinking Red & Oops, We Missed the Risks

I had intended to make this issue all about ‘Variable Interest Entities’ (VIEs) and the emerging risks to about $1.8 trillion dollars’ worth of Chinese shares listed on U.S. exchanges – that is, 4% of the capitalization of the U.S. stock markets.
7/22/2021

Nikkei Asia

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

‘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.’
7/22/2021

Financial Times

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Jamie Powell | Financial Times
7/22/2021

Foreign Policy

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Sulmaan Wasif Khan | The Fletcher School of Law & Diplomcy, Tufts University and the author of 'Haunted by Chaos: China’s Grand Strategy from Mao Zedong to Xi Jinping'
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China's Grand Strategy
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1 | 'Wolf Warriors Killed China’s Grand Strategy—and We'll All Come to Miss It'

‘The predominant feature of Chinese conduct today is not grand strategy but a belligerent, defensive nationalism that lashes out without heed of consequences.’ Sometime in 2020, China came unmoored from its grand strategy.
6/3/2021

Foreign Policy

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Sulmaan Wasif Khan | The Fletcher School of Law & Diplomcy, Tufts University and the author of 'Haunted by Chaos: China’s Grand Strategy from Mao Zedong to Xi Jinping'
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China's Grand Strategy
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2 | Blame It on Xi

‘In China’s case, the Xi era has seen the accumulation of somewhat counterproductive policies that catalyzed a breakdown.’
6/3/2021

Foreign Policy

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Sulmaan Wasif Khan | The Fletcher School of Law & Diplomcy, Tufts University and the author of 'Haunted by Chaos: China’s Grand Strategy from Mao Zedong to Xi Jinping'
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China's Grand Strategy
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3 | Enter the ‘Wolf Warriors’

‘What changed in 2020 was that nationalism for its own sake became the predominant motif of Chinese conduct.’
6/3/2021

Foreign Policy

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Sulmaan Wasif Khan | The Fletcher School of Law & Diplomcy, Tufts University and the author of 'Haunted by Chaos: China’s Grand Strategy from Mao Zedong to Xi Jinping'
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China's Grand Strategy
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4 | Why China Abandoned Its Grand Strategy

‘The most persuasive explanation is that China has poisoned itself through its own rhetoric.’
6/3/2021

Foreign Policy

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Sulmaan Wasif Khan | The Fletcher School of Law & Diplomcy, Tufts University and the author of 'Haunted by Chaos: China’s Grand Strategy from Mao Zedong to Xi Jinping'
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China's Grand Strategy
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5 | Two Caveats

‘Highlighting the strategic questionability of China’s policies doesn’t mean that Beijing’s fears of the outside world are completely unjustified.’
6/3/2021

Foreign Policy

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Sulmaan Wasif Khan | The Fletcher School of Law & Diplomcy, Tufts University and the author of 'Haunted by Chaos: China’s Grand Strategy from Mao Zedong to Xi Jinping'
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China's Grand Strategy
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6 | The Risks & the Dangers

‘The real danger is that once toxin has spread through the system, there is no knowing where it will end.’
6/3/2021

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Malcolm Riddell
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China's Grand Strategy
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Killing China's Grand Strategy

Trend: Under the Xi Jinping administration, China has amped up abrasive ‘Wolf Warrior’ diplomacy; cracked down within its borders, despite protests and criticisms from other countries; become increasing bellicose in responding to those protests and criticisms, and any other pushback it doesn’t like; and increased its aggressive rhetoric and actions against neighbors. Risks: If this sounds like a problem just for the world’s Ministries of Foreign Affairs, think again – the impact extends deep into business and finance.
6/3/2021

Project Syndicate

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Shang-Jin Wei
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Columbia University

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China's demographic challenges
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'Sex and the Chinese Economy'

‘A rise in China’s male-female ratio may have contributed to between one-third and one-half of the increase in its trade surplus with other countries.’ ‘The sex imbalance thus likely underpins an important source of tension between China and the US. Yet bilateral engagement has paid scant attention to this linkage.’
5/27/2021

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Malcolm Riddell
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China's demographic challenges
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'Demography + Technology is Destiny'

The census showed that the number of births nationwide fell to the lowest level since 1961, following a nationwide, manmade, famine caused by Mao’s “Great Leap Forward” that killed tens of millions of people, and that China’s total population could peak in the next few years.
5/27/2021

Bloomberg

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China's demographic challenges
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'China: Births Falling'

‘China’s total population could peak in the next few years, spurring profound changes for the world’s second-biggest economy.’
5/27/2021

Bloomberg

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China's demographic challenges
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'China Bets on Productivity Over Population to Drive Its Economy'

‘Beijing has a two-pronged approach to maintaining economic growth as its population shrinks.’ ‘First, it intends to slow the decline of the urban workforce by raising the retirement age and encouraging migration of more of the country’s 510 million rural residents to cities.’ ‘Second, it plans to raise productivity -- a measure of economic output per worker -- with the latest five-year plan emphasizing better vocational education and more investment in scientific research, automation and digital infrastructure.’ [see second chart above]
5/27/2021

Financial Times

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Gideon Rachman | Financial Times
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China's demographic challenges
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'Lousy demographics will not stop China’s rise'

‘The old maxim ‘demography is destiny’ no longer holds in the same way that it used to.’ ‘A shrinking and ageing population may not have the same gloomy implications in the 21st century.’
5/27/2021