About a month ago, I wrote a post, entitled, “Variable Interest Entities (VIE) In China. What Would The Buddha (Steel) Say?” That post focused on Variable Interest Entitles which are workaround entities set up to allow foreign companies to do in China (through a Chinese domestic company) that which they are technically not supposed to be doing.
I am writing about VIE structures now because, according to this 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:”
A few days later, I received the following email from a loyal reader:
Can I ask you a quick follow-up question regarding the Buddha Steel stories?
You have more experience than me dealing with local/national government issues in China than me. In my mind the real danger with this situation is that it opens things up for local governments to stop these constructions regardless of whether the central government does so or not.
Do you think it’s likely we’ll see something like this?
I agree that the central government is unlikely to take action against Baidu, Sina etc. but I find it quite plausible that they’ll let local governments implement these types of objections as they please.
I promised a follow up post and here it is.
I used to write quite often of the differences in legal enforcement between China’s local governments and Beijing. Most of the time, these posts would conclude wtih our advising foreign businesses in China to get on good terms with their local governments, but to always still realize that being on good terms with their local governments will not insulate them from facing legal problems if they violate China’s national laws.
The above advice still holds true, but in the last few years we have noticed increasing enforcement of business laws by local governments and, more importantly, we have seen local governments increasingly enacting their own business laws. We also have confronted local government interpretation of national laws that vary so much from the norm as to render the same laws very different depending on location. We wrote of this in the post, “China ‘Laws’ Are Local And Don’t You Forget It.” We also touched a bit on the localization in our post, “China Government Contracts. Good Luck With That.” In many cases, what are called laws or are viewed as laws are really little more than local customs. These “customs” can have real impacts on business.
It just seems that many local Chinese governments are getting more assertive and independent in their handling of business laws. It also seems that so long as those local governments do not go directly against the laws coming from Beijing, Beijing seems not to care; Beijing seems fine with local governments enacting/enforcing laws that go beyond Beijing’s. However, Beijing does still care about local governments contradicting or failing to enforce Beijing’s laws and you still can get in trouble for violating China’s laws, no matter who locally is insisting there will be “no problems.”
All of this is combining to make staying within the law in China all that much more difficult.
Are you seeing the same thing out there?