Deal Structuring For RMB Funds' Investments Into "Red Chip" Companies In Light Of China's Tightened Capital Control

The purpose of this paper is to outline the dilemma currently faced by RMB funds who are interested in investing in innovative ventures with the potential of going public outside China,and then to propose regulatory recommendations,against the backdrop of China's economic downturn.The Chinese government must control capital outflows to stimulate the economy,but RMB funds desire for quality projects should not be sacrificed unconditionally as well This contradiction makes the paper's topic highly relevant in today's contextThis paper first covers the concept of a "red-chip" structure and China's regulatory regime for outbound direct investment(ODI),followed by a by-type analysis of deal structures presently used by practitioners to make possible RMB funds' investments in companies with red-chip structures while the capital control is ever-tightening.For each deal structure,this paper analyzes its advantages,risks,feasibility,legitimacy in light of domestic and foreign regulations,and then points out where such structure may be applied.In the policy recommendations section,this paper relies on macroeconomic theory to make arguments,which are corroborated by the necessity to pursue other interests of the Chinese governmentThe main methodology of this paper is not literature review,but a thorough consolidation of the author's practical experience,practicing lawyers' opinions and real-world cases.This paper is highly practice-oriented and the topic has yet to be addressed by any scholar,hence it is different from most academic writings in terms of methodology.This article will also leverage macroeconomic theories—balance of payments and central bank's balance sheet in particular—and business acumenThe paper produces three major outcomes which can both shed light on practice and provide a summary of the status quo for further academic research.The first outcome is the brief history and legal analysis of the red-chip structure(especially the VIE structure),including a track record of the positions toward such structure by China's regulators and judiciaries from 2011 till now.The second outcome is a dissection of China's ODI regime,involving the National Development and Reform Commission,the Ministry of Commerce,and the State Administration of Foreign Exchange;nuances for each process and certain types of entities(State Owned Enterprise under the central government and financial institutions)are highlighted.The third is component classified 7 types of deal structures with which RMB funds currently invest in red-chip companies.3 being temporary arrangements while 4 being backups;each is analyzed in terms of architecture,advantages,risks and where it should be adopted,based on the author's practice,interviews with practicing lawyers and real-world projects.Given the conundrum facing RMB funds pursuing investments in red-chip firms,the conclusion of this paper demonstrates(?)the rationality of liberalizing ODI for Chinese investors who will ultimately invest their money back into China,and(?)the necessity of doing so in order to meet the requirements of the Chinese government's other strategies.Liberalizing ODIs that are bound to reverse does not mean complete de-regulation.Instead,regulators should pay attention to how fast such ODIs reverse back into China,and to ensuring the existence of penalties formidable enough to deter violations.