Foreign investment in Chinese internet to face additional scrutiny

Changes to regulations governing foreign investment in Chinese internet firms will put mergers and acquisitions in the online space under greater regulatory scrutiny, the Financial Times reported. The regulations have clarified existing rules regarding the national security review of foreign investments in Chinese companies, and are meant to close loopholes that once allowed foreign firms to invest in mainland dot-com companies through contracts or multi-level investments that evaded such review. One common practice is the usage of variable interest entities (VIEs), in which a domestic company holds the license to operate an internet business, and the foreign-invested company controls the domestic license through a series of contracts, instead of direct share ownership. Analysts said that while Beijing is unlikely to force Chinese companies to unravel their VIE structures, future approvals for such investment vehicles are likely to be subject to more intense review.