China’s Foreign Investment Law and its impact on VIE operations

The legal framework regulating foreign investment in China has been subject to enormous changes during the past four and a half decades, all of which have recently culminated in the rather quick approval of a new comprehensive law on foreign investment in 2019. There have always been some industries in which foreign investment was more welcomed and encouraged and others, considered more sensitive for the country, in which foreign investment was restricted. Starting in the early 2000s, investors have utilized complex structures called special purpose vehicles (SPVs) or variable interest entities (VIEs) in particular, to ‘exploit’, to a certain extent, existing regulatory loopholes and ultimately obtain profits from entities operating in strategic industries. This thesis discusses the topic of the new China’s Foreign Investment Law (China FIL) and the impact it has on the operations involving VIE structures. Firstly, an analysis on the legal and political context in which the FIL was adopted is provided, together with an overview of the aims of the Law, and its structure and contents. Secondly, VIE structures and the regulatory loopholes ‘allowing’ their practice are briefly discussed, as well as the needs behind the decision to take part in such operations and the risks that they imply for investors and the market. Finally, the aim of this work is to identify in which ways China’s new Foreign Investment Law impacts on VIEs operations in China in the context of changed geopolitical dynamics; the matters of domestic VIE listings on the Shanghai Stock Exchange and the establishment of the SSE STAR Board are tackled, and selected famous cases are presented for explanatory reasons. The final part concludes.