Red chips are returning to China, are foreign funds prepared?

In recent years, a significant number of growth enterprises opted to erect red chip structures and list on foreign capital markets. During this process, the enterprise would bring in an offshore fund at the proposed listing platform level to take an equity interest prior to or at the same time that the Chinese actual controller would take a roundabout route to indirectly acquire or control a Chinese operating entity through an offshore trust or offshore company.

While this was to take advantage of the market credibility, managerial strengths and listing ability of well-known investment funds, certain enterprises also needed to bring in a genuine foreign investor to convert the Chinese company into a foreign-invested enterprise (FIE) so as to circumvent restrictions on round-trip acquisitions in the Provisions on the Acquisition of Domestic Enterprises by Foreign Investors issued by six ministerial-level authorities in August 2006.

Yet times change and the world with time. The attitude of foreign capital markets toward China concept stocks has undergone several ups and downs. China’s foreign investment policies are progressively liberalizing. The emergence of the New Third Board has caused the Chinese capital markets to continuously increase in size and price-earnings ratios to steadily rise. Such advantages as cultural, language, market and technical familiarity that come with local listings have given Chinese entrepreneurs pause to consider returning to their domestic capital markets.

Yang Run is a senior partner of Guangda Law Firm. She can be contacted on +86 20 8732 2282 or by email at ryang@gdlawyer.com