A contrarian view on VIEs | China Accounting Blog | Paul Gillis

A contrarian view on VIEs

The proposed Chinese foreign investment laws have received a great deal of attention because they propose to create rules to deal with the VIE structure.

Most analysts, including foreign and Chinese law firms, are saying the new rules propose to treat VIEs that are controlled by foreign firms as foreign invested enterprises, subjecting them to full regulation and possible exclusion if they operate in restricted sectors. But they also point out that the intent is to look at the ultimate control of the VIE, and if the foreign company is controlled by Chinese companies or individuals (and many are), then the VIE would not be treated as foreign controlled. This proposal is said to have come from Robin Li of Baidu.

Steve Dickinson at the China Law Blog is taking a contrary view. In his post, China VIEs are Dead. Done. Over. Stick a Fork in Them, Dickenson argues that the State Council has rejected the Robin Li proposal and the concept of Chinese controlled foreign companies is not going to be used. Instead the State Council is punting the decision to the various regulators. Dickenson points out the problems created if regulators selectively approve certain VIEs.

I don’t read it that way and align more with the views of the major law firms. I do agree that the VIE structure appears to be dead for companies not controlled by Chinese, and that mostly hits MNCs and those overseas listed companies that do not have control structures (Tencent, CTRIP and others). I am not a lawyer and especially not a Chinese lawyer, so I will leave it to the legal profession to sort out this issue. Dickinson argues that the issue will be resolved by the end of 2015. That will be good for investors, since the uncertainty over VIEs has led to a VIE discount in stock prices.

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