Yesterday the Communist Party School paper Study Times issued an article criticising the influence foreign capital has gained within the country’s sensitive IT sector. I think it’s fair to say that this situation should not come as a revelation to the party, as VIE structures are commonplace and increasing numbers of IT companies are filing to list on foreign exchanges.
But the fact that the issue is now openly discussed is of interest, as it could signal the Party’s wish to start dealing with it. So what information might we glean from this particular article then, bearing in mind that it’s just one article, and likely just the starting point of the debate?
2. Recognize the reality that there already is significant foreign investment in prohibited sectors, and find a way to regulate this investment instead of pretending to prohibit it. Prohibition has not worked, and China needs entrepreneurial companies like Baidu, Dangdang, CTrip and Ambow Education.
To my mind this article fits rather neatly in as a first step in Professor Gillis’ suggestion above. If we break down the article, the majority of the space is actually used to call attention to the VIE practice and how commonplace it is in the industry. Furthermore, the article doesn’t actually talk about banning and closing these companies outright, instead it talks of increased scrutiny into every aspect. Although some will disagree and argue that this article is in fact a call to ban foreign investment, I think we have to wait a while before we know how the debate will go.
While the main point of the article is about the purchase of influence by foreign capital in the IT sector, which is deemed dangerous for future political reasons, it makes no mention of different classes of shares – only of % of shares held. This oversight seems to overstate the actual influence of foreign capital. The fact is that many Chinese companies, and many western companies as well, issue and list with different classes of shares, sometimes with widely differing voting rights. Thus, the amount of shares does not necessarily represent the amount of influence an investor has. This should be a ready argument to put against their results, as I believe the actual voting power that is controlled by foreign capital to be far less than the % of stock held.
Allowing Chinese companies to list with non voting stock overseas could be one step for the Chinese government to take, should they wish to keep the door open for the country’s IT industry to seek foreign capital whilst limiting any actual influence over the industry.
But overall, I think it’s fair to assume that more debate will lead to more scrutiny, and quite possibly tighter regulations. Exactly how it will all play out is still hard to say, but it will be an exciting debate to follow.