It is easy to find bankers sighing about Chinese technology, media and telecoms deals these days. Since July, when the US Securities and Exchange Commission began an investigation into New Oriental Education and Technology Group, a New York-listed company that runs language schools in China, investors have been reluctant to touch Chinese TMT initial public offerings – a traditional driver of deals in the sector.
The US regulator looked into whether the company should be allowed to include profits earned by the variable interest entity, or VIE, that operates the English schools. Far from being a single company’s problem, the probe poisoned an entire sector since most of China’s internet companies use VIEs. These include large, established players that have been listed in the US for many years such as Sina, the web portal company that also runs China’s largest Twitter equivalent.
Since Beijing does not allow foreign investors to control ownership in the industry, these companies are organised around VIEs – firms that use contracts to grant an offshore holding company the right to control their business but do not give the offshore investors an actual stake.