Will China ban VIE structure for education firms?

September 06, 2019 10:48
Chinese authorities are expected to unveil soon an amended law related to private education system. Photo: Bloomberg

China's educational sector stocks suffered a sharp slide on Tuesday after Liu Wei, president of Renmin University, suggested that authorities should ban education-related firms from listing shares overseas using Variable Interest Entity (VIE) structure, to safeguard the nation’s education sovereignty and cultural and ideological safety.

Education has been one of the most hyped industries in recent years, beating internet and healthcare sectors. That includes private schools in K12 (kindergarten through 12th grade), as well as tutorial schools and other private educational organizations. Demand for quality education service in China has spiked as the number of middle-class families keeps growing.

After one year of consultation, an amended law on China’s private education system is expected to be unveiled soon.

At this critical juncture, when someone like Liu Wei, who is a standing committee member of the Chinese People‘s Political Consultative Conference (CPPCC), makes some comments, it is easily perceived as a signal of policy change.

If implemented, the policy could thwart the listing plan of many private schools in China which had been seeking to go public using VIE in the future.

Those that are already listed would have to worry about the possibility of being requested to give up the VIE structure or delist.

VIE structure has been a a long-time issue in China.

Due to numerous restrictions imposed on foreign ownership of businesses in finance, internet, energy, agriculture, education and other sectors, as well as issues like capital controls, VIE structure was invented to bypass the constraints.

In simple terms, owners of a Chinese firm would set up a company overseas, and then the two entities would sign an agreement, specifying that all economic interests of the domestic company would go to the owners of the foreign entity.

Lots of start-ups in China have used the VIE structure in the early days in order to lure foreign investors and private-equity funds.

However, some legal experts and investors have always had reservations about the VIE structure, which falls into a gray area under Chinese law.

After all, investors who own shares of a Chinese internet company using VIE structure don’t directly own assets of that company.

A clampdown now could rattle market confidence, as it’s estimated that half of China’s overseas listed firms have adopted the VIE structure. Many of them are from other sectors, with the list including tech giants Tencent, Alibaba, Xiaomi and Baidu.

This article appeared in the Hong Kong Economic Journal on Sept 5

Translation by Julie Zhu with additional reporting

[Chinese version 中文版]

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Hong Kong Economic Journal columnist