So the much talked about CSRC paper is finally available for public viewing, albeit through a leak.
Had a quick glance at it and it seems to be pretty much what was reported on. iChinastock has a good run-down of the basics of it, I’ll just be adding some quick comments afterwards:
The report describes Variable Interest Entities (VIEs) as a major threat to China’s national security, but does not suggest that China’s top leaders ban the structure.
iChinaStock has translated four key reforms proposed in CSRC’s report:
1) Chinese companies under the VIE structure must receive approval from by both the Ministry of Commerce (MOC) and CSRC to list overseas.
2) Old rules for old companies (those already listed overseas) and new rules for new companies (those not yet listed overseas). In other words, firms that are already listed overseas would be exempt.
3) Encourage Chinese Internet companies to list on the domestic market.
4) A few companies that have reasons and desires to list overseas, such as the internet companies that are temporarily unable to list domestically, should be able to list directly in foreign markets. Note: the meaning of this “direct listing” is still unclear.
One aspect not mentioned here is that the report also presents foreign ownership as bad for the industry, due to the potential of equity draining from China. The flip side of this is of course that it was foreign investors that helped the companies and the sector grow when it needed capital. One of the biggest issues that still plagues this sector in China is a lack of good financing options available, especially if the VIE window is closed.
Second, you will find an interesting proposal to collaborate with the SEC, and other foreign equivalents, regarding the enforcement of these issues. The basics would likely be that the SEC should check any VIEs being reported on their end with Chinese authorities, this would enable both sides to keep the situation under control.
Apart from these two points the iChinastock article seems pretty bang on to me. So let’s move on to some comments.
There are a couple of things I find rather interesting about this proposal, for instance if we assume that the internet companies allowed to list on foreign markets is likely to be quite few, otherwise why not just declare it an unprotected sector, then there will need to be plenty of action domestically to provide new financing options. If this doesn’t happen the companies which are already listed overseas will have a huge advantage in their access to capital, which would solidify them as the big players for the foreseeable future.
Another interesting thing to consider is what isn’t dealt with in this paper. It doesn’t touch on the current MIIT and GAPP issues, nor does it spell out what should happen regarding the enforceability of the contracts. It seems we could be heading for a rather strange situation where the government will “give the VIEs its blessing”, but still leave the issue of enforceability of the relevant contracts up in the air.
Above all else, the big question seems to be what is meant by allowing some companies to list directly. Allowing some of these companies to list with direct equity ownership would require changing a multitude of laws and edicts, so if this is the plan it’ll certainly be hard to implement.
Let’s not get too carried away here however. We are talking about a leaked research report from the CSRC, not only is it not, as far as we know, officially endorsed by the CSRC, the CSRC is far from the only ministry that would have to sign off on something like this.
It also bears mentioning that even with the government promising to stay out of the listed VIEs, they still aren’t as safe as equity ownership. GigaMedia didn’t need any government intervention to loose its’ China operations.