So I wrote about the Didi imbroglio earlier this week, suggesting Bloomberg's coverage was peculiarly slanted, omitted key details, and was over-critical of China. In both a news article and a commentary Bloomberg omitted the key details that Didi listed on the New York Stock Exchange, which is the authority for compliance with its own listing rules, and failed to identify the lead underwriters, JP Morgan, Goldman Sachs, and Morgan Stanley, who are collectively responsible for the accuracy and compliance of the investor prospectus for the IPO. Bloomberg also omitted the detail that what listed in New York was a Grand Cayman shell company with only contractual rights to Chinese company revenues.
This morning the BBC's coverage of the law suit on behalf of IPO investors filed yesterday helpfully clarified that the Chinese company Didi listed on NYSE was a 'variable interest entity' incorporated in Grand Cayman. The BBC also named the three lead underwriters as co-defendants in the law suit. So BBC has better market journalists than Bloomberg, at least on this story.
The VIE is a fascinating bit of financial innovation, originally conceived by Enron to hide losses from its balance sheet and shareholders - before it went bankrupt in December 2001. The VIE structure has now been used for more than USD 1.7 trillion in Chinese equity listings in New York to avoid Chinese statutory and regulatory constraints on foreign ownership of Chinese companies. What could go wrong?
The NYSE and Nasdaq are getting a large chunk of their listing fees from Chinese companies. New York investment banks are getting huge revenues from underwriting IPOs of Chinese companies. Why should the fact that foreign ownership is illegal under Chinese law pose an impediment to these lovely revenue streams? Hence enthusiasm for the VIE structure in New York, regardless of risks to investors, particularly mutual funds, insurance companies, and pension funds desperate for yield and growth.
Many Chinese are now getting wary of the risks, and so should supervisors, exchanges, and banks. Lawyers and analysts are warning that silence from Chinese authorities on VIEs does not signal consent. Executives of Chinese companies with New York listings are accelerating dual listings in Hong Kong.
VIEs are something to watch as a market risk factor if geo-strategic rivalries and US antagonism against China intensify. And Bloomberg should really improve its coverage because masking those responsible for listing decisions and process does not help illuminate the story.