Another Market Update Special with CHINA
Bloomberg reports: China to Close Loophole Used by Tech Firms for Foreign IPOs and that Companies currently listed in the U.S. and Hong Kong that use VIEs would need to make adjustments so their ownership structures are more transparent in regulatory reviews
But what is VIE? Should we be scared with our holdings on $BABA $Tencent $JD $PDD $BIDU and a looooong etc.??
The Variable Interest Entity (VIE) Structure is how almost every listed Chinese company we can buy outside of China is listed in the public markets.
The VIE works as follows; Company X creates a Cayman Islands listed shell company (no real business, no office, no employees), which it also calls X. Once Fake X has been setup, Real X then creates a complex web of legal agreements that serve to give Fake X a claim on the profits and control of the assets that belong to Real X.
Fake X then lists itself as a company on the NYSE, selling shares to investors under the name ‘X’. Wall Street banks take in millions of dollars in fees to list Fake X, and hundreds of investment firms and investors invest billions of dollars into buying shares of Fake X.
The problem?
The idea that a contract that is constructed to circumvent a law is not enforceable is a common law concept. Its Not, and China does not recognize this contracts. - Yet despite the very black and white illegality of the VIE structure, for the most part, the Chinese turn a blind eye to it. Hundreds of VIEs exist and some have done so for a decade or more.
At its most extreme case, China is completely within its legal right to declare all these VIEs illegal and therefore worthless.
Would they do something crazy and delist our favorite Chinese companies?
NO, I don't think so. There is a legitimate argument that China would not be so destructive as to enforce its own laws, as that would wipe trillions of dollars off the US stock market in an instant.
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