China’s Overseas IPOs

The world’s biggest population is more active online than ever, and foreign investors naturally want a piece of the action. A little problem: Chinese law restricts foreign investment in internet companies (along with telecommunications, mining and private education). Not to worry — where there’s a will, there’s a way, in this case an exotic corporate structure that magically turns a Chinese company into a foreign one with shares that overseas investors can buy. And they have. Chinese firms have raised more than $80 billion through first-time share sales in the U.S. over the past decade, including $4.4 billion in June 2021 by ride-hailing giant Didi Global Inc. It’s a risky business, though: while several Chinese agencies have begun to acknowledge the existence of VIEs for the first time in legal documents, nobody knows whether the Chinese government considers these structures legal. They may soon find out, however, as China amps up scrutiny of overseas listings by any Chinese company that operates mainly onshore.

China’s gargantuan online retailer Alibaba sold shares to U.S. investors in 2014, raising $25 billion in the largest initial public offering in history. To do this, it used a standard legal shuffle to deploy a variable interest entity, meaning it transfers profits to an offshore corporation with shares that foreign investors can own. Pioneered by the Chinese-language media company Sina in its IPO in 2000, the VIE structure is used by many of China’s internet companies, including Didi. Investors don’t own shares in Alibaba’s profitable e-commerce business. Instead, they hold a piece of a shell company in the Cayman Islands. The earlier Chinese companies went public with as much as 99% of their revenue tied to the VIE, but only 12% of Alibaba’s revenue and 8% of its assets were fixed to the structure. Shareholders are betting on rapid growth in China’s internet use: 70% of the population was online in 2020 — 989 million internet users. A lot is at stake for both China's national champions and U.S. investors including teachers and firefighters whose public pension funds have poured billions into China's tech firms. Among them: the California Public Employees’ Retirement System, the Washington State Investment Board and the Teacher Retirement System of Texas.