China clampdown risks spilling over | IFR – International Financing Review

China clampdown risks spilling over | IFR – International Financing Review

China's unprecedented clampdown on its education sector has sparked debate about which industry will be next to be caught in Beijing's crosshairs, and has also called into question the use of a legal structure that underpins trillions of dollars worth of foreign investment in Chinese companies.

On July 24, China's State Council, effectively its cabinet, and the Central Committee of the Chinese Communist Party, a top political body, issued new rules that will force K-12 after-school tutoring companies to register as non-profits and ban foreign investment in these companies either via M&A or variable interest entity arrangements.

The VIE structure makes use of offshore special purpose vehicles to circumvent China's rules on foreign ownership and is used by a number of US-listed Chinese companies, including giants like Alibaba Group Holding and Tencent Holdings.