Tim Culpan is a Bloomberg Opinion columnist covering technology. 0000004425 00000 n 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." If you hold shares in New York-listed Alibaba Group Holding Ltd., you don’t own a stake in a Chinese internet powerhouse. A VIE is an entity controlled by a company by means other than a majority of voting rights. 0000001691 00000 n %PDF-1.7 %âãÏÓ 0000029336 00000 n Alibaba is using a straightforward V.I.E. 0000007941 00000 n 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). So the VIE is listed in the U.S., not Alibaba itself. 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. 0000007522 00000 n Before it's here, it's on the Bloomberg Terminal. 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. " Gordon Chang believes that the Variable Interest Entity may not offer reasonable protection for U.S. based Alibaba shareholders. Keeping VIEs operating in a gray area gives policymakers the flexibility to crack down at will. 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. 0000001036 00000 n There may indeed be a lack of incentive to dismantle VIEs today, and doing so probably would hurt foreign-investor sentiment. 0000009109 00000 n <> 0000022944 00000 n 0000002120 00000 n 3. <<07E525CAECA3B2110A00B0A88DC4FD7F>]/Prev 871096>> 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. Alibaba stock represents shares of a variable interest entity (VIE) that is headquartered in the Cayman Islands, not China. He previously covered technology for Bloomberg News. VIEs are similar to … For now, these companies aren’t doing anything illegal and Beijing hasn’t seen the need to close this loophole. In fact, the country’s largest search and e-commerce provider They worry about the company’s VIE (variable interest entity) structure or the so-called “trade war” or accounting fraud elsewhere in the country and dump BABA stock. " 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. 0000002644 00000 n Homegrown heroes such as Alibaba and Tencent took advantage of a loophole to tap overseas investors. 0000010154 00000 n trailer 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. Alibaba's Regulatory Work-Around to China's Foreign Investment Restrictions many of its economic sectors.5 To work around these restrictions, China's In- ternet companies utilize a complicated and highly risky investment method known as a Variable Interest Entity ("VIE").6 Variable Interest Entities in China 13 March 2019 Investors in Chinese companies soon encounter an obscure accounting term –the variable interest entity or VIE. S&P previously accounted for such risk among VIEs operating in sensitive businesses, such as Alibaba and Tencent, though not for others in more mundane areas like retail. I understand their reasoning, but disagree with the conclusion. The VIE is how a number of Chinese tech firms have managed to … We don’t just need more regulations and mandates. 0000003450 00000 n Alibaba set up a variable interest entity (VIE) in the Cayman Islands to get around restrictions from the Chinese government on foreign stock … 0000009484 00000 n 0000002915 00000 n The next Treasury secretary could make the lives of millions of Americans easier at no cost at all. 0000007002 00000 n Read more about China's new antitrust rules turn up heat on internet giants like Alibaba on Business Standard. 152 37 Photographer: Andrew Burton/Getty Images North America. Yet having a gray area within an opaque legal system simply puts such companies and investors at the whim of policymakers. 0000023118 00000 n 0000036022 00000 n We need clearer information on how the virus works so that we can avoid it. 0000034339 00000 n endobj By supporting the president’s efforts to overturn the election, the party is endangering its very existence. 0000014823 00000 n 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. 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. There's almost $1.3 trillion of market value tied up in overseas listings of Chinese variable interest entities. Alibaba is a Variable Interest Entity ( VIE) , which means it’s registered in the Cayman Islands and makes 90 % revenue in mainland China. structure for its Chinese assets. Have a confidential tip for our reporters? Trump’s Republicans Are a Faction, Not a Party, A Letter From 9 Million U.S. Expats to Janet Yellen. 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 … For years, knowledge that the Chinese government could take action at any time hung a legal cloud over VIEs. is ultimately controlled by Alibaba Partnership, a collection of 38 people, most of whom hold senior positions in the company. 0000005485 00000 n Silence is certainly better than an explicit ban. In that light, it’s not inconceivable that officials would take steps to eliminate the structure, even if it spooks foreign investors. This essay will <>stream 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. 0000003188 00000 n 0000001713 00000 n 0000001582 00000 n 1 0000034523 00000 n S&P interprets this to mean that concerns have diminished. The VIE allowed Yahoo to buy a 40 percent stake in the company for 1 Billion U.S. %%EOF Investors in … 0000000016 00000 n 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. The other concern is that Alibaba is listing as a variable interest entity (VIE). Chinese technology giants from Alibaba Group Holding Ltd. to Tencent Holdings Ltd shed almost $290 billion of market value over two days of frantic selling, as investors scrambled to … 0000006538 00000 n But as the trade war intensifies, China has a growing incentive to keep its tech giants, and their cash, at home. 0000014643 00000 n This would have a value of 10 Billion for Alibaba’s IPO for Yahoo. Alibaba's revenue primarily comes from sellers paying to get elevated in search results on its platforms. Alibaba has taken advantage of an obscure and complex investment vehicle called the Variable Interest Entity, or VIE. 188 0 obj 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. startxref Dollars. 0000006001 00000 n 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. 0000010827 00000 n アリババがアリペイに出資をしているのではなく、アリペイからの利益を吸い上げる権利(Variable Interest Entity)を持っているという意味でVIE方式と呼ばれます。V 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 … This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. 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 $39 Billion Splashout, The Boston Tea Party’s Warning for Facebook and Google, Even Covid-19 Can't Stop the Christmas Wars, Pandemic Housing Shifts Will Speed Recovery in 2021, Three Big Moves to Improve American Lives ASAP, English Exceptionalism Is One More Big Brexit Hurdle, Modi Needs One More Farm Law to End Crisis. Renren and Baidu, for example, are variable interest entities. 0000008458 00000 n hÞb```c``©d`e`HŠ`àg@ ~ Ç$Á7]_û…x_Z=ýòtÉ­÷KïÕs³]¶´(k]^º×zfØó¯U«v¯ÚµzՊ †®*åiY)«v. 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. That’s looking riskier these days. It also enables firms to raise money abroad and lets early investors get their funds out of the country. Take “variable interest entities” (VIEs), a kind of corporate architecture used mainly by China’s tech firms, including two superstars, Alibaba and … 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 … 0000003722 00000 n In 2011, after a series of public events, the variable interest entity ("VIE") structure re-attracted a lot of attention and concerns from the PRC authorities, entrepreneurs, investors and other market participants. 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. VIE … Investors and founders are still keen to list in the U.S. as a means to get dollars from their stakes in Chinese startups. exchanges relying heavily on a corporate structure called a variable interest entity (VIE). 0000004986 00000 n China laid out detailed regulations for the first time to root out monopolistic practices in the internet industry In 2005, Yahoo invested in Alibaba through a Variable Interest entity. 0000003996 00000 n 0000002379 00000 n 0000029161 00000 n To non-accountants 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. The variable interest entity ("VIE") has long been a popular structure for foreign parties to invest in sectors which are restricted by China’s industrial policy to foreign investment. 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 0000004270 00000 n If such carrots keep failing, Beijing could very well bring out sticks. 0000023660 00000 n It's extremely unlikely that the legal interpretation of … 0 What you have are the American depositary receipts of a Cayman Islands company that has a contract with the Chinese firm. xref 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. 152 0 obj Party, a Letter from 9 Million U.S. Expats to Janet Yellen don ’ t own a stake the. Their stakes in Chinese startups you hold shares in New York-listed Alibaba Group Ltd.! In 2005, Yahoo invested in Alibaba through a variable interest entity action at time! Americans easier at no cost at all up in overseas listings of Chinese variable interest.... 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