There appears to be significant change in the winds for VIEs. Reuters is out with an article that reports on a CSRC document sent to the State council that has apparently been read by at least four law firms.
Rumors I have been hearing all day say it recommends policy changes to bring the VIEs home in a manner similar to my recommendations on cleaning up the VIE sector.
I made these recommendations in April, and perhaps I have a reader at the CSRC:
1. Make it easier for Chinese companies to directly list overseas without using an offshore entity. Many companies have chosen the VIE approach as a way of getting around cumbersome Chinese regulations.
2. Recognize the reality that there already is significant foreign investment in prohibited sectors, and find a way to regulate this investment instead of pretending to prohibit it. Prohibition has not worked, and China needs entrepreneurial companies like Baidu, Dangdang, CTrip and Ambow Education.
3. Bring the offshore structures back onshore. Encourage U.S. listed Chinese companies with offshore parents to merge the offshore company into the Chinese operating company. This will give China better regulatory control over these companies and it will give the shareholders real ownership of the operations. That is a good tradeoff for investors. China needs to develop rules to make this possible.
4. Develop a regulatory structure that works for these companies, and which coordinates effectively with the SEC and PCAOB.
5. Create opportunities for U.S. listed Chinese companies to obtain a listing on Chinese stock exchanges. Let the markets decide the best place for a Chinese company to obtain capital, not regulatory barriers or even worse, the opportunity to avoid regulatory oversight. Think Baidu is hot on NASDAQ? Wait till you see what it does on ChiNext.
6. Use a carrot and a stick. Make it easy for firms to regularize their operations, and then strictly enforce existing Chinese laws on any companies that do not restructure.
Watch this space.
For a good analysis of what is known today, read Stan Abram's post at China Hearsay. There are a few other pundits claiming they saw this coming a mile off, yet their first posts on the issue were a month ago.