This pragmatic device meant that the company was deemed to be simultaneously 100 per cent owned by the Chinese (to suit the Chinese regulator) and 100 per cent owned by Western investors (to suit Western regulators).
Everyone turned a blind eye, not least the assorted ESG benchmarks, which ignored the clear governance risks associated with the structures, a number of which emerged in late July when the Chinese government decided to change the ability of companies in the Chinese for-profit education sector to actually make profits.
End of the workaround
These included a number of VIE structures, but the dash for the exits by Western investors dragged in all the other Chinese VIE stocks, most noticeably the tech giant Alibaba as well as benchmark China stocks like HK-listed Tencent.
The fact that these two also dominated a number of emerging market ESG benchmarks has been rather awkward for many.
The reality is that under Xi, the where and the how of investing in China have now changed. You can still participate in cash flows emanating from the Chinese economy, but you need to do it on China’s terms, which now means buying stocks via Hong Kong or Shanghai exchanges.
The VIE and ADR structures are now effectively dead.
You also need to recognise that the standard western model of privatisation and leveraging of public goods in order to provide a rentier class with annuity income is not going to happen in China.
The Chinese authorities are for the 99 per cent, not the 1 per cent. Self-serving Wall Street-types and hedge funders are declaring that this is terrible for the Chinese economy, but as a net exporter of capital, China doesn’t need Western savings to finance its capital investment. This latest move suggests that the reason for allowing Western involvement thus far has been much more about efficient market pricing than access to capital.
As far as the Chinese are concerned, the US can sell all its Chinese stocks at fire-sale prices, and they will be more than happy to pick them up.
Out of Kabul
As for the other US withdrawal — Afghanistan — while most focus has been on the geopolitics and the how, rather than the why it happened, we believe that this also has important implications for investors.
The reality is that the US first went into Afghanistan as part of the last Cold War against Russia and had remained there as part of its New Cold War against China. It has now been pushed out.
Landlocked Afghanistan is right in the middle of the One Belt One Road (OBOR) project linking China to Russia, the Gulf and the West and the crucial role that the countries of the Shanghai Cooperation Organisation, (SCO) who are essentially Afghanistan’s immediate neighbours (plus India) have played in the return of the Taliban should not be underestimated.
OBOR will now accelerate and the 70 per cent mobile penetration in Afghanistan is likely to be moved straight to Huawei.
Meanwhile, in addition to untapped reserves of metallurgical coal, oil and gas – all of which would be eagerly picked up by energy-hungry China – Afghanistan is estimated to have an abundance of high tech and ‘green’ materials such as copper and rare earths: famously described as the Saudi Arabia of lithium. This will be a magnet for capital from the rest of the SCO with Western investors unlikely to get much of a look in, even if their ESG filters were to allow them.
Mark Tinker is the founder of Market Thinking and blogs on behavioural finance and markets at Market-thinking.com.