Four New Reforms Revealed in Chinese Clampdown on VIEs, Overseas IPOs

A different kind of clampdown (Image source: icanhascheezburger.com)

Variable Interest Entities (VIEs) – those structures that form an agreement between Chinese web companies and foreign investors – have been the source of much teeth-gnashing and stock-plunging in recent months. And now we seem to have a clear answer to go on about their feasibility: in future, Chinese tech firms will need to get local regulatory approval in order to go ahead with overseas IPOs.

It’s not the ban on VIEs that some had feared in the international investment community, but it is a tightening of restrictions. It also puts a new layer of paperwork in the Chinese overseas listing process, as well as extra uncertainty, more potential for corruption; and a (corresponding) possible need for guanxi that will help only well-connected companies.

Chinese newspaper The Economic Observer revealed the four new reforms earlier today. They are:

1. Chinese companies seeking to list overseas must seek permission to do so from both the China Securities Regulatory Commission (CSRC) and the Ministry of Commerce.

2. The new rules apply to only new listings, and do not affect those who have already listed overseas.

3. To strengthen the domestic capital industry, companies are encouraged to list on local markets.

4. Internet companies that are temporarily unable to list domestically, should be able to list directly in foreign markets.

That last point is very unclear right now, and a bit baffling. Even iChinaStock, linked below, can’t figure it out either.

Authorities in China are claiming this crackdown is an issue of national security, where foreign firms might have stakes in sensitive financial or hi-tech sectors.

The controversy over VIEs flared up in June and July of this year over Yahoo’s (NASDAQ:YHOO) stake in Alibaba (HKG:1688), which includes the Alipay online payment system. Yahoo’s stake in Alipay proved massively problematic in it getting a new, mandatory online payments license for the Chinese market.

[Source: The Economic Observer – article in Chinese; via iChinaStock]