152 0 obj 0000007941 00000 n 0000010154 00000 n The VIE allowed Yahoo to buy a 40 percent stake in the company for 1 Billion U.S. Tencent Holdings Ltd., Meituan Dianping and Baidu Inc. all hew to various versions of the VIE, allowing them to exploit a gap in Chinese law. When Enron Met Alibaba: The Rise of VIEs in China We conduct what is, to our knowledge, the first systematic examination of Chinese-based firms that utilize a variable interest entity (VIE) structure to evade Chinese regulation on foreign ownership to list equity in the U.S. 0000007002 00000 n Keeping VIEs operating in a gray area gives policymakers the flexibility to crack down at will. In a report last week, analysts Clifford Kurz and Sophie Lin wrote that recent changes in China’s foreign-investment law make no mention of VIEs, after an earlier draft sought to prohibit them. Given the state of U.S.-China relations, there’s little reason to believe policymakers will prioritize the concerns of foreign investors over its own desire to prevent capital flight. In total, almost $1.3 trillion in market capitalization is linked to Chinese VIEs listed outside the mainland, according to U.S. credit-ratings provider Standard & Poor’s Financial Services LLC. 0000014643 00000 n Gordon Chang believes that the Variable Interest Entity may not offer reasonable protection for U.S. based Alibaba shareholders. 1 the variable interest entity (VIE) with a disproportional control structure.2 VIEs involve a complex set of financial arrangements that enable foreign investors to circumvent the … 0000009109 00000 n 0000002120 00000 n China laid out detailed regulations for the first time to root out monopolistic practices in the internet industry Ma, who said he plans to retire from Alibaba next year, is surrendering control over the variable-interest entities, or VIEs, that hold the company’s business licenses. So the VIE is listed in the U.S., not Alibaba itself. 0000014823 00000 n Dollars. Yet having a gray area within an opaque legal system simply puts such companies and investors at the whim of policymakers. But as the trade war intensifies, China has a growing incentive to keep its tech giants, and their cash, at home. If such carrots keep failing, Beijing could very well bring out sticks. Photographer: Andrew Burton/Getty Images North America. 0000034339 00000 n This business structure, called a variable-interest entity, became common among Chinese companies because Beijing restricts foreign investment in certain sectors, such as the internet. 0000022944 00000 n I understand their reasoning, but disagree with the conclusion. Yet as my colleague Nisha Gopalan wrote recently, Chinese companies still want to raise dollars, both to fund expansion and give Western venture-capital firms a hard-currency exit. A variable interest entity (VIE) refers to a legal business structure in which an investor has a controlling interest despite not having a majority of voting rights. (Bloomberg) -- Chinese technology giants from Alibaba Group Holding Ltd. to Tencent Holdings Ltd shed almost $290 billion of market value over two … 0000005485 00000 n 0000001691 00000 n exchanges relying heavily on a corporate structure called a variable interest entity (VIE). 0000002644 00000 n To contact the author of this story:Tim Culpan at tculpan1@bloomberg.net, To contact the editor responsible for this story:Rachel Rosenthal at rrosenthal21@bloomberg.net, Irrational Exuberance Hits the Oil Market, The Vaccines That Could Use a Shot in the Arm, AstraZeneca Can Justify Its $39 Billion Splashout, The Boston Tea Party’s Warning for Facebook and Google, Even Covid-19 Can't Stop the Christmas Wars, Pandemic Housing Shifts Will Speed Recovery in 2021, Three Big Moves to Improve American Lives ASAP, English Exceptionalism Is One More Big Brexit Hurdle, Modi Needs One More Farm Law to End Crisis. 0000029161 00000 n " In a securities filing in July, Alibaba Group disclosed that executive chairman Jack Ma will be stepping away from the company’s variable interest entities. 152 37 Tim Culpan is a Bloomberg Opinion columnist covering technology. The gist is that the Chinese internet giant is reforming its legal structure, which uses a fragile and ingenious device known as a variable interest entity (VIE). Before it's here, it's on the Bloomberg Terminal. It's extremely unlikely that the legal interpretation of … This would have a value of 10 Billion for Alibaba’s IPO for Yahoo. U.S.-listed Chinese internet companies such as search giant Baidu (BIDU) and e-commerce giant Alibaba Group Holding (BABA) utilize a corporate structure called a … Take “variable interest entities” (VIEs), a kind of corporate architecture used mainly by China’s tech firms, including two superstars, Alibaba and … 0000003188 00000 n xref 0000001036 00000 n <<07E525CAECA3B2110A00B0A88DC4FD7F>]/Prev 871096>> This essay will Wikipedia defines a VIE as "an entity in which the investor holds a controlling interest that is not based on the majority of voting rights." 0000003996 00000 n This year alone, 31 Chinese companies chose to raise almost $6 billion by listing in the U.S. Not because they get better valuations there, but because founders and VCs know a public offering in China would give them illiquid assets subject to capital controls. %PDF-1.7 %âãÏÓ Alibaba stands as China’s underdog success story in the e-commerce industry, yet much remains unexplored about the consequences of its unique Variable Interest Entity (VIE) structure. For years, knowledge that the Chinese government could take action at any time hung a legal cloud over VIEs. To non-accountants Renren and Baidu, for example, are variable interest entities. By supporting the president’s efforts to overturn the election, the party is endangering its very existence. VIEとは、Variable Interest Entityの略称で、米国会計基準では変動持分事業体と訳されているものです。外資規制の対象となる事業は実際には中国のVIEが行います。VIEの株式は、形式的に中国人株主(アリババにおいては、経営者の 0000003450 00000 n A VIE is an entity controlled by a company by means other than a majority of voting rights. In 2005, Yahoo invested in Alibaba through a Variable Interest entity. Neither factor amounts to much if Beijing one day gets fed up with Chinese companies using overseas listings as a way to get their assets offshore. The next Treasury secretary could make the lives of millions of Americans easier at no cost at all. VIEs are similar to … What you have are the American depositary receipts of a Cayman Islands company that has a contract with the Chinese firm. 0000023660 00000 n 0000007522 00000 n There may indeed be a lack of incentive to dismantle VIEs today, and doing so probably would hurt foreign-investor sentiment. 0000036022 00000 n This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. This means that in assessing VIEs, foreign investors need to consider whether they’re willing to leave $1.3 trillion to the whims of a Chinese legal gray area. 0000004986 00000 n <> Investors and founders are still keen to list in the U.S. as a means to get dollars from their stakes in Chinese startups. 0000023118 00000 n 0000004270 00000 n We need clearer information on how the virus works so that we can avoid it. startxref 0000010827 00000 n Beijing has tried all sorts of things to encourage its companies to list at home, the latest being the SSE STAR Market – a Nasdaq-style tech board – for which regulators eased rules to attract interest. The accounting definition of “variable interest entity” (VIE) is an entity in which an investor holds a controlling interest based on contractual arrangements and not based on owning the majority of voting rights. If you hold shares in New York-listed Alibaba Group Holding Ltd., you don’t own a stake in a Chinese internet powerhouse. %%EOF Have a confidential tip for our reporters? 0000009484 00000 n 0000003722 00000 n Alibaba is using a straightforward V.I.E. 0000001713 00000 n 0000029336 00000 n Variable interest entity (VIE) is a term used by the United States Financial Accounting Standards Board (FASB) in FIN 46 to refer to an entity (the investee) in which the investor holds a controlling interest that is not based on the majority of voting rights. " He previously covered technology for Bloomberg News. Alibaba stock represents shares of a variable interest entity (VIE) that is headquartered in the Cayman Islands, not China. We don’t just need more regulations and mandates. S&P interprets this to mean that concerns have diminished. Variable Interest Entities in China 13 March 2019 Investors in Chinese companies soon encounter an obscure accounting term –the variable interest entity or VIE. 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