BEIJING (AFP, BLOOMBERG) – Beijing on Wednesday (Dec 1) denied a report that it was looking to plug a loophole used by Chinese technology companies to go public on foreign stock markets.

Bloomberg News reported, citing unnamed sources, that China was planning to ban firms from using offshore structures known as variable interest entities (VIEs), closing a gap used by tech giants such as Alibaba and Tencent in recent decades to avoid restrictions on foreign investment and listings abroad.

But the China Securities Regulatory Commission rejected it.

“We have noticed the reports… This news is not true,” it said in a statement on its website.

Such a ban would mark a major step by China to clamp down on overseas listings.

Beijing has stepped up scrutiny of major foreign listings after a New York initial public offering (IPO) by ride-hailing giant Didi Chuxing went ahead this year despite regulatory concerns.

The authorities have since launched investigations into Didi over cyber security, ordered it removed from app stores and extended probes into other United States-listed Chinese companies.

The Bloomberg report said the change was expected to be included in draft foreign listing rules that could be finalised as quickly as this month.

It said, however, that companies using VIE will still be allowed IPOs in Hong Kong as long as they satisfy regulators. Bloomberg added that the rules were still in the draft stage and could be changed.

In the past year, China has embarked on a wide-ranging regulatory crackdown that has scuppered IPOs and hit big businesses as the government seeks to rein in their influence.

Banning VIEs would potentially thwart the ambitions of firms like ByteDance contemplating going public outside the mainland.

The demise of the VIE route would further threaten a lucrative line of business for Wall Street banks, which have helped almost 300 Chinese firms raise about US$82 billion (S$120 billion) through first-time share sales in the US over the past decade.

VIEs have been a perennial worry for global investors given their shaky legal status. Pioneered by Sina Corp and its investment bankers during a 2000 IPO, the VIE framework has never been formally endorsed by Beijing. 

It has nevertheless enabled Chinese companies to bypass rules on foreign investment in sensitive sectors, including the Internet industry. The structure allows a Chinese firm to transfer profits to an offshore entity – registered in places like the Cayman Islands or British Virgin Islands – with shares that foreign investors can then own.

While virtually every major Chinese Internet company has used the structure, it has become increasingly worrisome for Beijing after tech firms infiltrated every corner of Chinese life and amassed reams of consumer data. Companies holding the data of more than one million users must undergo approval when seeking listings in other nations, the Cyberspace Administration of China said in July. 

Till recently, Beijing had little legal recourse to prevent sensitive overseas listings, as with the Didi IPO. Officials have asked the ride-hailing giant to devise a plan to delist from the US, sources said last week, an unprecedented request.

Since a crackdown on Didi began in early July, only one mainland-based Chinese company has priced a US IPO, while 29 have listed shares in Hong Kong, according to data compiled by Bloomberg. NetEase’s Cloud Village will debut in the city on Thursday, while the closely watched offering of SenseTime is expected to start trading in the week of Dec 13. 

China’s heightened regulatory scrutiny has been echoed in the US. The US Securities and Exchange Commission has halted pending IPOs by Chinese companies until full disclosures of political and regulators risks are made, warning investors may not be aware they are actually buying shares of shell companies instead of direct stakes in businesses.