Variable Interest Entities (VIE) in China. What Would Buddha (Steel) Say?

Home | China Law Blog | Variable Interest Entities (VIE) in China. What Would Buddha (Steel) Say? One of the things I love about blogging is how I get my stories. This one came to me via an international lawyer in Portugal who sent me a link on Buddha Steel (more on that later) from the China Accounting Blog. First, I am going to briefly discuss Variable Interest Entities (VIE) and how they are typically used in China. VIEs are corporate structures usually set up to get around China not allowing WFOEs to participate in China's internet sector. China Accounting Blog does an excellent job explaining a typical VIE in its post, Explaining VIE Structures, which I urge you to read now. Now that you understand VIE structures, you should realize they are (at their core) a work-around that essentially permits foreign companies to do exactly what China's laws have been set up to prevent them from doing: controlling a company involved in China's Internet sector (or other sector prohibited to foreigners). Despite this, these VIE structures are quite common. But are they legal? I have asked this question of countless foreign lawyers who set up VIE structures and their response is typically something along the lines of "they seem to be allowed." But we lawyers know that "allowed" and "legal" are not the same thing. Many years ago, for various reasons, my law firm made the decision not to set up VIE structures. I am writing about VIE structures now because (according to a Pillsbury Client Alert) Buddha Steel, a Chinese company publicly traded in the United States, revealed last week "that the PRC government had disallowed its variable interest entity (VIE) structure." The Pillsbury Alert states that "it is not clear whether this [Chinese government action] is a highly sector-focused event, part of a broader move by the PRC government against VIE structures—or, as we think most likely, a 'one-off' event driven by local facts and circumstances:" There is probably less here than meets the eye. VIE structures are commonly used by foreign investors in China to obtain a degree of control over, as well as a substantial economic interest in, operations which they are not permitted to own directly. They were first used in the internet sector by companies such as Sina.com, Baidu, Sohu, Netease, and others. Many of these companies are now among the crown jewels of Chinese industry. The use of VIE structures then spread to other restricted-industry sectors, such as advertising, tourism and education, and eventually into non-restricted sectors as well. No government approval was required to enter into the agreements used to set up these structures, and they did not appear to be prohibited by Chinese law. As time passed, industry players believed the PRC government was at least tacitly approving the use of appropriate VIE arrangements in China. The Pillsbury alert then talks of two prior occasions when PRC authorities "issued public statements warning foreign investors against the use of VIE structures" but attributes both of those as intending to target specific industry sectors, "not VIE structures as such." The Pillsbury alert sees the Buddha Steel action as most likely a "one-off" event: It is also possible, and in our view more likely, that the action by the local authorities in Hebei was a "one-off" event motivated by facts peculiar to this situation. A true policy shift is more likely to come from the central government in Beijing, as the two previous warnings did, rather than from local or provincial authorities. In addition, the language used by the local authorities does not have the formality we would expect to see from a national policy pronouncement. That said, it remains a possibility—though we believe it is unlikely—that this is the first tremor of what would be an earth-shaking change in the PRC government's attitude toward VIE structures generally. If that is the case, it would certainly chill foreign investment in a number of industries, including many high-technology sectors. Given China's ongoing efforts to drive its economy up the technology curve, and the need for capital in this process, it would seem self-defeating for Beijing to take this step. For that and other reasons, we do not think this is what is happening. I agree with the conclusion, but for different reasons. I think Westerners too often use the word "self-defeating" to describe situations where Beijing puts politics over business and I have seen too many instances of this to think that a good reason for this anti-VIE action not to spread. But in the end I agree with the Pillsbury Alert because I do not believe Beijing would essentially announce a national policy of such significance on a deal like this and in the manner employed. Yes, Beijing loves throwing out trial balloons, but usually not like this. Check Out Our China Law Services Share Twitter Facebook LinkedIn E-mail Comment Dan Harris Dan Harris is a founding member of Harris Sliwoski, an international law firm where he mostly represents companies doing business in emerging market countries. Most of his time is spent helping American and European companies navigate foreign countries by working with the international lawyers at his firm in setting up companies overseas (WFOEs, Subsidiaries, Rep Offices and Joint Ventures), drafting international contracts, protecting IP, and overseeing M&A transactions. In addition, Dan writes and speaks extensively on international law, with a focus on protecting foreign businesses in their overseas operations. He is also a prolific and widely-followed blogger, writing as the co-author of the award-winning China Law Blog. Harris Sliwoski Attorney Read more posts [email protected] Read More China Business, Legal News Related Posts September 15, 2026 Your AI-Drafted China Contract Says It Needs a Lawyer. Listen to It. September 11, 2026 Forensic Accountants in China Business Litigation: How True Numbers Can Tell the Wrong Story September 4, 2026 China NNN Agreement or Trademark Registration? You Usually Need Both September 1, 2026 AI Didn't Replace Lawyers. It Gave Us the 48-Page Contract. August 27, 2026 Do I Need a China NNN Agreement or a China Manufacturing Agreement? Usually Both. August 26, 2026 China’s New Overseas Investment Rules: Can Your Chinese Investor Actually Get the Money Out? August 24, 2026 International IP Protection for Startups: What to Protect and Where August 19, 2026 The Documents Are the International Deal August 19, 2026 China Supplier Fraud in Yiwu: Why We Recommended the Police, Not a Lawsuit August 17, 2026 China Trademark Registration: Why U.S. Companies Need More Than a Filing Agent August 10, 2026 Buying Expensive Equipment from China: Seven Questions to Answer Before You Pay August 7, 2026 DDP Shipping Risks: What Boise Cascade’s Guilty Plea Means for U.S. Buyers August 6, 2026 Protecting Your Artwork Internationally: What Artists Need to Do Before the Work Travels August 5, 2026 Your China Employee Signed the Vacation Policy. You Can Still Lose. July 29, 2026 The RedNote Contract Lesson for Companies Doing Business in China Leave a comment Cancel reply