Essay on Foreign Investment in China: The Variable Interest Entity

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“The risks of Variable Interest Entities have long been known... however these risks require clarification by China before they are taken seriously”. To what extent is this accurate and what does it mean for the future of Variable Interest Entities? Introduction The Variable Interest Entity (‘VIE’) is a well-established and widely utilised structure of investment employed in foreign investment in China. It entails a succession of contractual arrangements which hold the principal intention of circumventing the investment restrictions China has placed upon foreign ownership in particular sectors of the Chinese market. Consequently, the legal validity of VIEs has been a point of contention since its very inception. The Sina…show more content…
In consequence this exposes the institutional challenges that confront the ‘state capitalism’ model of China, including attempts to both maintain and broaden the Party-state’s level of control. In consequence, the future prospects of VIEs in China are dependent upon the way in which Chinese policy-makers decide to respond to these institutional challenges. This paper has six parts. Following this introduction, Part II introduces a general analysis of the origins and structure of the VIE, taking into consideration the reasons for why the VIE structure was brought into existence. Part III will take a look at the horizontal risks involved with VIEs and the perilous nature of the VIE contract. Part IV will then explore the domestic vertical risks associated with VIEs, including an analysis of the regulatory measures currently in place, as well as case examples of the core vertical risk currently plaguing VIEs, selective enforcement. Part V will look at the offshore vertical risks related to the VIE structure, such as tax related issues and the potential hazardous outcomes such as de-listing and invalidation of the company. Part VI concludes the paper by discussing the future of the VIE structure and the ways in which the VIE as well as its surrounding influencing factors could be altered on the part of the investors and the Chinese government in order to bring

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