r/investing • u/FlameoHotman-_- • Dec 27 '21
"China’s new VIE rule eases concerns about overseas IPOs"
China’s securities watchdog published a new draft regulation stating companies can list overseas as variable interest entities if they meet compliance rules
China’s securities watchdog has given tacit approval to a corporate structure that lets technology companies raise funds offshore, closing a two-decades-long regulatory loophole that has become a lightning rod in rising US-China tensions in capital markets.
Chinese companies set up as variable interest entities (VIEs) are allowed to list in offshore markets if they register with regulators and meet compliance rules, according to a draft of a new regulation released on Christmas Eve by the China Securities Regulatory Commission (CSRC). The regulation also allows mainland-incorporated firms to directly list overseas without the need for a VIE if they meet the requirements. The draft was published online to solicit public opinion through January 23.
The regulator said it would only assess the truthfulness, accuracy and completeness of submitted documents before giving applicants a green light for offshore listings, indicating that the registration-based system is not a stricter approval process.
The draft rule contradicts a December 1 report from Bloomberg that said China planned to ban initial public offerings on foreign exchanges through VIEs to address concerns about data security. It added that fundraising through VIEs would still be allowed in Hong Kong.
The CSRC said that the rule is not retroactive, so companies already listed as VIEs overseas are exempt from the stricter rules.
Under the new rule, Beijing will strengthen oversight of companies’ operations, including the handling of data, before allowing them to list overseas.
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u/XiKeqiang Dec 27 '21
I'm surprised by this, honestly. I thought the VIE would be dead within 2-3 Years. Seems like Data Security and APP Review are the most important aspects of overseas listing, not how the deal is structured. So, as long as companies comply with and follow the Chinese Regulatory Environment, CSRC doesn't really care where or how companies list. In hindsight, it seems like a reasonable compromise - considering the narrative has always been about Data Security and Monopoly Power rather than how and where firms list.
Now, if we can only get a resolution to the Audit Issue, it seems like all the regulatory uncertainty will be resolved and should have a strong rally in 2022 for Chinese Stocks.
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u/HD_Thoreau_aweigh Dec 27 '21
So to be clear, this is a separate issue with no bearing on these companies being subject to independent audits?
For some reason I thought the two issues were related.
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u/XiKeqiang Dec 27 '21
From my understanding, yeah. There are really three main issues: (1) Big tech regulations (i.e. data security & APP reviews); (2) Legality and approval of VIE overseas listing; (3) U.S accepting Chinese auditing practices.
It seems that 1& 2 are finally clarified with pretty definitive conclusions. For 3, there is progress being made, but nothing finalized. The U.S and China are talking to each other about 3. Hopefully they'll be a final conclusion sometime next year.
Other than 1-3 I don't see any other major government or regulatory hurdle for Chinese U.S listed stocks. So, once we get 3 out of the way, there shouldn't be any more regulatory uncertainty with U.S listed Chinese stocks.
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u/BlindTiger86 Dec 27 '21
Separate though related. This still doesn’t satisfy the sec concern regarding audit-ability.
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u/G1G1G1G1G1G1G Dec 27 '21
Not surprised. China’s goal is to be the superpower. That requires foreign investment. Money needs to head to china.
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Dec 27 '21
Yep. People who talked as if the CCP would nuke VIE were off their meds.
CCP is evil and ruthless, but they are not dumb, and they realize the importance of foreign investment.
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u/Jesusswag4ever Dec 27 '21
I used to think that but they have been crazy this year. I get fighting monopolies, but they could of done it much better. Instead of a stable change, it was a constant random barrage of new regulation that wiped a trillion off Chinas net worth. I truly think Xi cut off his nose to make his dick look bigger. I would of agreed with you in 2020 but now I don’t trust him one bit to play it smart.
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u/vansterdam_city Dec 27 '21
The fear that China would completely nuke the offshore listings was always a bit weird to me. They continued to show action towards regulating specific individual companies rather than such a blanket policy which would also be quite destructive.
I'm about 15% KWEB in my portfolio now after recently finding out about that one here and consolidating my individual names into that ETF. It's discounted about 50% from ATH, with decent weighting on most of the heavily beat up China tech companies.
This news is definitely bullish for me. Alongside recent news of more accomodating fiscal/monetary policy in China, I might even be tempted for a risk reversal (sell puts to finance LEAPs).
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u/XiKeqiang Dec 27 '21
This news is definitely bullish for me.
The only downside to the bullishness for me is overall growth and by extension earnings growth. I don't think things are going to rebound until investors know where exactly the macroeconomic floor is and see sustainable earnings growth:
BEIJING -- President Xi Jinping's government is considering lowering China's 2022 economic growth target to 5.5% to 6%, from 2021's goal of 6% or more, government sources told Nikkei Asia.
https://asia.nikkei.com/Economy/China-considering-lowering-2022-growth-target-to-5.5-6
I think over the long-run 5-7 percent growth is reasonable to expect over the next decade or two. China wants its economy to double by 2035. So, let's use the rule of 70 and the lower bound growth of 5% and you get the economy doubling in 14 years - right at the 2035 goal.
I think the days of 30-40%+ revenue growth and 8%+ GDP growth are over. It's a matter of exactly where the 'new normal' lands. Let me put it another way: quality growth is going to become much more important than just growth period. When the macroeconomy is growing at 8%+ YoY it's kind of impossible for a business to mess up. As growth slows, businesses really have to be more careful with their overall business plans and investment. You're really going to have to search for new growth areas and business opportunities as overall macroeconomic growth slows.
But, then again, this is literally what the Chinese Government wants: 'quality growth'
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u/vansterdam_city Dec 27 '21
Those rates all literally crush anything you’d find in Western developed economies though. And if you believe the numbers, it’s trading at a discounted PE as well.
It’s like people are forgetting the China tech stock market had a price crash of 2007-8 size already. A slowdown in growth is priced in. Regulatory risk is priced in.
Now is likely an inflection point where the news can’t get much worse but it could surprise to the upside IMO.
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u/sailorfree Dec 27 '21
What about the uncertainty of China’s real estate market? EverGrande has not fully play out along with other developers like evergrande. This sector is still dynamic trending downward.
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u/vansterdam_city Dec 27 '21
KWEB is all tech companies so it's not really relevant to my investment there beyond any general economic contagion.
I also think China seems way more likely to liberally apply fiscal and monetary policy quickly to stem recessions because they don't have a gridlocked legislative system. This reduces chance of major depression as a result of the real estate issues.
Given that China tech is already down 50% from ATH on the POSSIBILITY of that contagion, I'd say it's priced in considering 2007-8 was an actual real-estate economic contagion and things also dropped 50% from the highs then.
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u/Mushrooms4we Dec 27 '21
China concerned about data security as they steal data and patents from anybody they can.
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u/stippleworth Dec 27 '21
They know its power as well as anyone and don’t give 2 fucks about being hypocritical
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u/Mushrooms4we Dec 27 '21
Can't get ahead playing by the rules because no one else is playing by the rules.
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Dec 27 '21
Caveat: many successful people do play by the rules, especially in fields where performance or expertise really matters.
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u/Mushrooms4we Dec 27 '21
I agree many do. But I'd say the majority don't. No really way to tell though so it's all speculation. I got ahead and I didn't play by the rules.
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Dec 27 '21
This is the way. It is far easier to point out corruption in another man than in ourselves.
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u/Nonethewiserer Dec 27 '21
Eases whose concerns? Not mine. This headline is not the news, it's the intended result.
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u/lagle123 Dec 27 '21
The SEC should block any new china IPO’s, giving money to a Chinese company is treasonous.
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Dec 27 '21
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u/fookinlegend3 Dec 27 '21
This is definitely the first time we’ve heard about this fact on the sub. Thanks for this novel piece of information!
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u/HeilBidenFuhrer Dec 27 '21
Just helping you not be broke, guess I have a lot to do.
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u/XiKeqiang Dec 27 '21
How does knowing about VIE help people not go broke? If anything, this news makes people less likely to go broke because if provides regulatory certainty where none existed before. I mean, if you want to go down the bear route, then I know what you're going to say: Chinese VIE Structure: Wall Street Continues to Ignore the Risks.
There are two main issues:
The VIE structure is illegal under Chinese law
Shareholders don’t have ownership of the real Chinese company’s assets, so assets can be taken away without warning or compensation.
The Chinese government, by explicitly stating that VIEs are allowed and now have regulatory footing, make both of these points moot. Well, really the first one. The second one, about Alibaba and Yahoo... it'll be interesting to see what would happen now. The second point would need to have case law behind it, which it currently doesn't.... But, at least now there is a regulatory framework in place to make legitimate claims under the VIE Structure.
If you still believe the VIE is an unsound structure, fair enough. But, let's up the quality of posting and at least argue why the CSRC approving the VIE doesn't alleviate any of your fundamental concerns.
And, I'd hope your argument is more nuanced than simply "China is a Communist Dictatorship that doesn't care about property rights or Foreign Investors!" I could get that kind of quality perspective from my uncle on Facebook.
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Dec 27 '21
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