The restrictive environment for foreign investors in the China business landscape, and willingness of investors to push large amounts of capital into the growing economy, has led to the emergence of alternative business models. Among the many options available to foreign investors, the “Variable Interest Entity” structure offers greatest autonomy and returns for investors.

Options for Foreign Investment in China

The Variable Interest Entity (VIE) structure has been accepted by foreign investors as a mode of investment in sectors that are restricted for foreign capital in China. The structure allows Chinese domestic entities to list on foreign capital markets. From a regulatory perspective, there is neither any clear endorsement nor any specific prohibition of the VIE structure by Chinese authorities. Hence, the VIE structure has remained a grey area within the Chinese legal system. Though the VIE structure permits both foreign and domestic investors to work within the framework of governmental regulations and reviews, but without a clear endorsement of the VIE structure by regulatory authorities the structure poses several legal and regulatory risks. The future of China’s regulation for VIEs is based on its anticipated creation of an improved environment for all market players, by way of laws that address uncertainties in the investment sector.

The current analysis explores the options that are available to foreign investors in China and explores why VIEs have been the preferred vehicles of investment. Also, the article discusses possible regulations that may affect the legitimacy of VIE business structures.

The main forms of options available to Foreign Investment Enterprises (FIEs) in China are

  • Operations involving Chinese partners
    • Joint Ventures – Equity Joint Venture (EJV) or a Cooperative Joint Venture (CJV)
  • Operations without partners
    • Wholly Owned Foreign Enterprises (WFOE)
    • Representative Offices (Rep Office)

Read the full article for further insights into the factors to be taken into consideration when applying the Variable Interest Entity Model to doing business in China.