Those who thought investing in Chinese IT-stocks was risky yesterday will put on the Beatles as they long for the trouble-free environment of yesterday.
I saw a Tweet from Bill (@niubi) over at DigiCha that just sent me into a frenzy of reading and emailing to try to get on top of this new development. I’ll update this and subsequent posts as we get more information.
The Chinese Academy of Social Sciences have released an article pointing to the dangers of foreign controlled companies in the Chinese internet sector, and seems to be pushing for much more of a hard-line stance against the practice.
Study Times (Original Chinese)
The piece doesn’t just brand the obviously foreign companies as being controlled by foreign capital, but includes almost every Chinese internet company in this group. As such the risk of increased scrutiny of VIE structures (explained at lengths in the article), and any dealings between foreign and domestic players in the sensitive IT market has gone up significantly.
“If we judge by the indicator that a foreign control of over 20% stake is relatively controlled, and over 50% is majority-owned, then most Chinese Internet companies that are listed offshore are controlled by international capital,” the authors wrote. “International capital thus controls our Internet industry.”
Translation from WSJ article
The report also comes at a time of increased nationalism and an overall lauding of the communist party and “red values”, which should give political forces inclined to act on the article a good base of support. Protecting China from foreign influence is a good line of argument even in moderate times, which could well bode for some public outrage, claims of entrepreneurs selling out the country etc. in the weeks to come.
The report itself is basically a description of the current situation of the IT-industry in China with foreign listings, and VIE-structures. This is followed by recommendations to increase the domestic abilities to finance growth in the Industry (PE, VC etc.), increase the legal scrutiny of both the capital structure and the actual business operations in the industry, and also take very seriously the threat of foreign capital in the industry as it’s a power that can grow.
Although I think the report misses the mark on some issues, the details are unlikely to matter too much, the bigger picture will sell it.
One of my disagreements with the article lies for instance in that the Alipay case to some extent demonstrates the power that VIE structures can give the Chinese government over the IT-companies, rather than highlight the dangers of foreign investment.
That this issue is being discussed in this detail, at this level, at this point in time, should give everyone reason to take this quite seriously, indeed.