On 20 July 2021 SVA issued a Risk Advisory Bulletin to clients and selected media outlets as to key market risks associated with variable interest entity (“VIE”) structures. These arrangements were deliberately designed to circumvent Chinese restrictions on foreign investment in certain areas, and are now acutely vulnerable in the context of worsening geopolitical tensions.

The SVA Bulletin proved accurate and timely, as the government of the People’s Republic of China (“PRC”) has since published new regulations targeting the education sector. These new measures strictly limit foreign investment, and so underscore the deep frailties of the VIE structures common in that sector – as outlined in the SVA assessment. This vulnerability is true not only of education, but also of many other sectors, particularly technology.

The rising risks outlined in the SVA bulletin were first picked up and reported in coverage in the Chinese-language Ming Pao newspaper on Friday 23 July 2021, but English-language media coverage was slow to respond, and only emerged in the wake of a steep decline in Chinese shares listed in the US on Monday 26 July and Tuesday 27 July 2021.

These share price falls and poor-quality western media coverage of the risks have brought home to investors in the US and worldwide just how intense political risks in China and Hong Kong have become. US pension funds, particularly tracker funds, and other strategic investors, now find themselves deeply affected by these sudden changes. In short, decoupling, much discussed, now seems to be happening in reality, and political risk is rapidly becoming the predominant concern between the US, China and Hong Kong.

Looking forward, political risks will likely intensify. China’s National People’s Congress (“NPC”) reportedly plans a meeting on 17 to 20 August 2021, to consider the implementation in Hong Kong of a blocking statute on sanctions, through Annexure 3 of Hong Kong’s Basic Law. Such a law will present businesses with an acute challenge in dealing with potentially incompatible US and Chinese rules. Any further moves by the US to implement sanctions may therefore have unforeseen outcomes.

https://stevevickersassociates.com/services/business-intelligence/political-risk-assessment-services SVA are specialists in Political and Business Risk and can assist senior management and Boards of Directors, in providing accurate and timely political risk assessments, tailored to specific market segments or industries. In particular, it might be unwise to rely on those same professional advisors who advocated such unorthodox investment vehicles, to implement risk management measures; those advisors may face regulatory pressure themselves, in the current volatile environment.

SVA (www.stevevickersassociates.com) is a specialist risk mitigation, corporate intelligence and risk consulting company. The firm serves financial institutions, private equity funds, corporations, high net-worth individuals and insurance companies and underwriters around the world.