The Legality of the VIE Structure

Chapter 6 is devoted to the topic of Variable Interest Entity (VIE), which is widely used for overseas listings of Chinese companies. The legality of VIE has long been a subject of intense debate in China due to its alleged circumvention of China’s foreign investment law: The VIE structure allows foreign investors to participate in overseas-listed Chinese companies through contractual control rather than a shareholding relationship, thus bypassing relevant restrictions on foreign investment in China. This chapter argues that China adopts a policy of strategic ambiguity about the legality of the VIE structure, so as to balance the need to protect national security and the need to facilitate overseas listing of Chinese companies. There are institutional reasons behind this policy, including interest group politics of regulatory agencies and the rent-seeking activities of regulatory officials. The policy of strategic ambiguity will likely continue in the foreseeable future, and so will the uncertainty over the legality of the VIE structure.