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VIEs in the new foreign investment law

Bloomberg has an article out today reporting on China’s new foreign investment law that has been working its way through the National People’s Congress the past couple of weeks. The article suggests that the new law lessens concern about a crackdown on VIEs.

The proposed new foreign investment law is considerably briefer than a similar law that was floated in 2015 but withdrawn. The 2015 version clearly stated that the VIE structure could not be used to circumvent the foreign investment law. That provision has been removed from the 2019 version. The new version is much shorter than the 2015 version and some of the new provisions included are likely designed to reduce trade tensions with the US.  

The 2015 version was tough on VIEs, but provided a way out. All overseas listed companies other than state-controlled companies use foreign (typically Cayman Islands incorporated) parent companies. The 2015 proposal said that if a foreign company was ultimately controlled by Chinese then the rule forbidding use of VIEs would not apply. Most, but not all, overseas listed Chinese companies use some form of control structure (most commonly two classes of shares). I believe what that meant was the companies that use control structures to keep Chinese founders in control (like Alibaba, Baidu and most other private Chinese companies) would not be treated as foreign. I believe this meant that not only would VIEs be permissible in these situations, but they might be unnecessary, since the company could directly own businesses in restricted sectors.  

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