China’s new IPO listing rules: VIE-ing for Party-Business harmony
In a series of announcements starting in December 2021, regulatory authorities in China overhauled the existing frameworks for how Chinese companies list themselves. The draft rules proposed by the China Securities Regulatory Commission (CSRC) introduced a new framework to supervise the sale of Chinese companies’ shares overseas. The rules proposed the establishment of a unified supervision system to oversee the sales of all overseas listings of a Chinese company, regardless of the location of its Initial Public Offering (IPO). Subsequently the Ministry of Commerce lifted foreign investment restrictions on several previously banned sectors. Then in January 2022, the Cyberspace Administration of China (CAC) specified that companies with more than 1 million users will be subject to a comprehensive review before proceeding with foreign listing (Nikkei Asia).
The reforms were made to prevent Chinese firms from going public in the US market and generating more profits. In particular, the reforms were intended as a direct blow to the Variable Interest Entity (VIE) model, which several Chinese companies have used for foreign investment. Most popularly used by Alibaba to list its shares on the New York Stock Exchange, the VIE structure allows Chinese companies to use an offshore entity to list its stock overseas. The measure was designed to circumvent Chinese government restrictions on foreing investment in areas such as media and telecommunications. The legal status and general acceptability of VIEs has always been unclear in China. But innovations from within, most notably from Alibaba, successfully attempted to address its shortcomings. While not outright banning the model, the new regulations impose more scrutiny on companies firms seeking foreign investment while operating with a VIE structure. The new rules also give the Chinese government the power to make Chinese companies dispose of foreign business for nationals security purposes.
The language of ‘national security’ adopted by the Chinese regime to justify these reforms intended to give the impression that they are essential to protect the rights of Chinese citizens. However, the reforms seem to be yet another example of how the CCP regime in China is seeking more and more control over private entities in China to maintain its supremacy. Alongside ushering in a new era of prosperity and global dominance, China’s tech revolution has also propelled its stewards — the founders and CEOs of its tech companies — into the global elite, where they can shape global opinion and act as representatives. The CCP views this as a challenge to its authority as the sole representatives of the Chinese people (Financial Times). Restrictions follow to curb the global influence that tech giants and their founders can amass. Those who speak up are compelled into silence by the government with extreme punitive measures. Alibaba founder Jack Ma notably disappeared from the public eye after making a controversial speech criticising China’s banking establishment. As a retaliatory measure, Chinese authorities blocked the IPO of Alibaba’s parent company Ant Group hours before it was to go live, leading to the company losing $74 billion dollars of its valuation. This harsh crackdown on tech firms and dissent against it has forced an exodus of several billionaire tech-founders from China. While enacted on the pretence of protection and ensuring free competition, these measures are ultimately only hampering the significant progress made by China’s tech firms, and the future gains that they could deliver.
