Variable interest entity structures in China: Are legal uncertainties and risks to foreign investors part of China’s regulatory policy?

Abstract

Over the past two decades, variable interest entity (VIE) structures have been used widely for foreign investors to access Chinese industries that are closed or restricted to foreign investment. However, the legality of the VIE structure has been neither recognized nor denied by Chinese authorities in the general sense and has thus been a focus of legal scholarship. Nevertheless, existing literature has rarely covered China’s regulation on VIE usage from 2015 onwards. This article endeavours to narrow the research gap. It argues that the ambiguous legality of the VIE structure is a Chinese regulatory policy for economic development but with legal risks to foreign investors. China’s recent regulation has reflected a policy continuation and not clarified the legal uncertainties of the VIE structure, notwithstanding the occurrence of some positive changes, such as the achievement of the first domestic VIE listing. Instead, against Didi’s US VIE flotation as a trigger, China has been tightening the national control over domestic companies’ overseas listings, which may change the landscape of future VIE listings and help Chinese capital markets become a beneficiary.