Summary of Key Points
The VIE (Variable Interest Entity) structure was once the "golden path" for Chinese internet companies to connect with overseas capital and achieve listings abroad. However, due to reforms in the Hong Kong stock market, the rise of RMB-based capital, a shift in the industrial structure towards hard technology, and increased regulatory requirements, it is evolving from a default option to a specialized tool for specific scenarios. At the same time, the logic of corporate globalization has also changed from "listing abroad = becoming global" to relying on genuine operational capabilities (such as overseas revenue and local teams) to establish a presence globally. In the future, companies will need to choose the appropriate capital structure based on their business model, source of capital, and regulatory requirements.
Detailed Analysis
1. Why was VIE the "global capital passport" for internet companies?
VIE is not just a simple agreement; it's a complex network of nested capital structures. Founders use BVI (British Virgin Islands) companies to hold shares, while US dollar funds invest in Cayman Island-based entities that, in turn, set up WFOEs (Wholly Foreign-Owned Enterprises) in China through Hong Kong companies. These entities then use exclusive partnerships and equity pledges to indirectly control the domestic businesses with licenses. This structure solved two critical issues:
- Access for foreign capital: Core internet services (such as value-added telecommunications) were restricted from foreign ownership, but VIE allowed foreign investment through offshore companies without direct control of domestic firms.
- Listing and exit strategies: Early A-share markets required three consecutive years of profitability, which was difficult for cash-strapped internet companies. US and Hong Kong stock markets were less lenient with unprofitable companies, so VIE enabled them to list on the US market (e.g., Sina in 2000), meeting the exit needs of dollar funds.
This structure supported China's internet boom, with companies like Taobao, Meituan, and Didi benefiting from VIE and foreign capital, allowing them to sustain heavy investment in expanding their markets.
2. Why is VIE less popular now?
VIE is no longer the standard approach for several reasons:
- The Hong Kong stock market has become more welcoming: The HKEX allowed unprofitable biotech companies (18A chapter) and companies with different voting rights for the same shares (8A chapter) to list in 2018, and in 2023, it opened up for specialized tech companies (18C chapter). For example, Zhipu Huazhang (an AI company) listed directly on the HKEX using the 18C chapter without needing a VIE.
- Shift in industrial focus: The focus has shifted from light-asset internet businesses to hard technology (chips, renewable energy, biomedicine), which are less restricted by foreign capital and can more easily list via domestic H-share routes.
- RMB-based capital has become dominant: 96% of equity investments in 2024 were made by RMB funds, so companies no longer rely on US dollars for early financing and do not need an offshore structure.
- Stricter regulations: Overseas listings now require registration, and VIE structures must disclose control details more transparently, increasing compliance costs.
Data shows that in 2026, less than 5% of newly listed companies on the HKEX used the red-chip structure (including VIE), down from 30% in 2025.
3. Don't confuse! Internationalization of capital does not equal true globalization:
Many companies mistakenly thought that listing on the US market meant globalization, but it was mainly about accessing international capital (e.g., registering in Cayman and raising funds in US dollars), with operations remaining in China. True globalization involves:
- Generating overseas revenue (e.g., SHEIN, which earns over 90% of its income abroad).
- Having local teams and supply chains (e.g., TikTok with offices worldwide).
- Complying with local market regulations.
Overseas listings are more of a tool to expand presence but do not replace genuine global operations. For example, an internet company listed in the US with all domestic users does not truly achieve globalization; whereas Temu, with its overseas supply chain and localized operations, demonstrates true globalization.
4. How should companies choose their capital structure?
Companies should select their structure based on their specific needs:
- Hard technology companies: Those without foreign ownership restrictions can directly list on the H-share market (e.g., chip or renewable energy firms).
- Mature leaders: Can use A+H dual listings to connect with domestic and international capital.
- Companies needing overseas expansion: Use a standard red-chip structure with an overseas holding entity to control domestic companies, suitable for those with international businesses or global equity incentives.
- Companies with existing US dollar financing or restricted operations: May retain VIE (e.g., internet firms that have received multiple rounds of US dollar investment, as dismantling the structure is costly; or those in industries with sensitive regulations).
5. The future of VIE:
VIE will not disappear completely but will be used in specific contexts:
- Existing companies: Those that set up VIE structures earlier (e.g., Alibaba, Baidu) will face significant costs in restructuring due to equity, tax, and foreign exchange issues.
- Specific industries: Industries with foreign ownership restrictions (e.g., internet news, online media) may still rely on VIE for separation.
However, VIE will become a specialized tool used by fewer companies. The focus will shift from using the same structure as in the past to choosing the most suitable one for their development needs.
In summary:
VIE was a crucial tool for Chinese internet companies to access international capital, but with changing circumstances, it has evolved from a standard approach to a specialized tool for specific situations. Corporate globalization now focuses on genuine operational capabilities, such as generating revenue and establishing a presence globally, rather than simply listing in certain markets. (Note: This article does not provide investment advice; the market carries risks.)