China Drafting Big Tech Blacklist to Curb Foreign Investments

China business regulation

As part of China’s continuing big tech crackdown, regulators are devising a blacklist targeting new companies that use variable interest entities (VIEs) to run their businesses, Financial Times (FT) reported on Wednesday (Dec. 8), citing unnamed sources.

The blacklist is anticipated to keep a tight rein on the central channel used by start-ups to woo global investors and go public abroad. The move is intended to curtail the contribution of international shareholders in China’s next generation of tech companies.

Changes are not anticipated to affect companies already in operation, four sources familiar with the situation told FT. The creation of the blacklist is being overseen by China’s state planner, commerce ministry, securities regulator and central bank.

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Used for decades by technology firms in China, including Alibaba and Tencent, VIEs are a legal structure that sidesteps limits on foreign capital enabling startups to raise billions from global investors.

The blacklist for VIEs could include industries that collect reams of data or pose concerns over national security, the sources said. In the U.S., restrictions are in place to limit Chinese investments in San Francisco-area startups.

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Existing companies already using the VIE structure are not likely to be affected by the blacklist, two of the sources close to the financial regulators said. The goal of the list is to ensure that the next big companies critical to China’s economy are not controlled by global shareholders.

“VIEs are not dead entirely, but essentially they are [for future purposes],” said one of the people. “In the future, foreign investors can put money into traditional industries, as opposed to tech.”

Traditional sectors are not required to use the VIE structure to attract foreign investors, the sources told FT.

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The blacklist could be released this month, two of the sources said. Another source said the list’s publication could be dependent on how the way the U.S. manages the latest rules for Chinese companies trading in New York.