China to close loophole for foreign IPOs?
A legal workaround that has allowed Chinese companies in restricted industries to raise capital abroad, primarily in the U.S., looks set to end.
China is reportedly planning to close a loophole that has long allowed Chinese tech firms like Alibaba and Tencent to list on foreign stock exchanges, according to Bloomberg.
The ban will most likely prevent future startups from tapping into foreign capital, but will likely leave existing U.S.-listed tech companies intact.
- The so-called variable interest entity (VIE) structure is a loophole that Chinese media and internet companies have used since the 1990s to access overseas capital, despite this being technically illegal.
- Firms already listed in the U.S. would likely need to make adjustments, especially in areas with sensitive security issues, so that their ownership structures can be more easily subject to regulatory reviews.
However, the China Securities Regulatory Commission denied the story on Wednesday. But no further details were provided, and commentators have not been reassured.
- The news is no surprise: After Didi was pulled from app stores in July, Bloomberg reported that China’s market regulators were already considering a revision of VIE rules.
- The latest news suggests that Beijing has chosen the most drastic option: closing the loophole entirely, as opposed to simply raising the requirements for tech companies.
- Beijing, meanwhile, is shepherding its data-rich companies to Hong Kong. They include the music-streaming venture Cloud Village, Inc. and artificial intelligence giant SenseTime.
Key question: How much of a funding advantage does listing in the U.S. give Chinese tech companies? As China pulls more of its tech companies back to Hong Kong, will the differences in stock exchanges be felt on a general economic level? In other words, is China trading innovation for security?
