The Future of Chinese Foreign Investments: An Exploration of the Perils and Consequences of Investing in Variable Interest Entities

Joanne Eales

Abstract


The Variable Interest Entity (‘VIE’) has long been a well-accepted structure for foreign investors within sectors that concern China’s investment restrictions. They are also utilised as a means by which Chinese domestic entities can list overseas on capital markets internationally. From a regulatory perspective, despite there being no clear prohibition regarding the VIE structure in China, there has also been no specific endorsement of the VIE structure either. Consequently, the VIE structure has remained a grey area within the Chinese legal system. Though the VIE structure permits both foreign and domestic investors to circumvent governmental regulations and reviews, this simultaneously means that the VIE structure hazardously lacks the backing of the relevant authorities which presents a number of legal and regulatory risks. Thus the future of China’s VIEs is based upon its anticipated creation of a genuinely level playing field and an improved rule-of-law environment for all market players; so as to render any VIE-type structure redundant and prevent further uncertainty from infiltrating the investment sector. 


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