China's Regulation of Domestic Companies' Indirect Overseas Listing: A Critical Assessment after the Financial Fraud
Since the end of 2010, a large sum of China-based companies listed on U.S. stock exchanges have been investigated by the U. S. Securities and Exchange Commission (SEC) for financial fraud, some of which have been suspended trading or revoked the securities registration.Triggered by the SEC investigation, the first huge setback relentlessly struck the China-based companies since they set foot on the international capital market nearly twenty years ago. On March 14, 2011, the U.S. Public Company Accounting Oversight Board (PCAOB) issued a report raising serious concerns about the audits of China-based reverse mergers companies.On June 9, 2011, the SEC issued an investor bulletin to warn investors on investment risks involving reverse merger companies.On July 11, 2011, credit-rating firm Moody’s Investors Service published a red flag report, lifting warnings about accounting and corporate governance risks at dozens of China-based companies.By the end of June 30, 2011, thirty class actions had been filed against China-based companies listed on U.S. exchanges and the companies' directors and officers.This crisis of deteriorating trust on China-based companies revealed the serious deficiencies of the cross-border listing regulatory mechanism between China and the U.S., which call for immediate remediation. Competent authorities from China and the U.S. held a symposium on audit oversight in July 2011, which represents an important step toward Sino-U.S. cooperation on audit oversight of public companies.
In fact, the Sino-U.S. cross-border listing regulatory mechanism comprises three parts, namely, China’s oversight of domestic firms’ overseas listing, U.S.’s oversight of China-based companies’ listing, and the cross-border regulatory cooperation between the two countries. Under the current regulatory framework, China’s domestic firms can go publicly listed on foreign securities markets in two ways, namely, direct overseas offering and listing of securities (hereinafter direct overseas listing) and indirect overseas offering and listing of securities (hereinafter indirect overseas listing), and the corresponding regulatory framework has been established and developed based on the division of these two forms. More specifically, direct overseas listing refers to the overseas issuance and listing of securities by a joint-stock limited company incorporated in the PRC Mainland, while indirect overseas listing refers to the issuance and listing of securities by a company incorporated outside the PRC Mainland (excl. Hong Kong, Macau and Taiwan) after establishing the red-chip framework, i.e. acquiring the stakes, assets or revenue of one or more domestic enterprises in the PRC Mainland. Based on the nature of domestic firms’ ownership, indirect overseas listing can be further divided into two categories, i.e. grand red-chip listing (mainly suitable for state-owned enterprises (SOEs)) and small red-chip listing (mainly suitable for private companies).Based on the operation mode for issuance, indirect overseas listing can be further divided into IPO, listing by introduction and reverse merger listing.Most of the China-based companies whose honesty is being sternly questioned are small red-chip firms that went publicly listed through reverse mergers.
There have been huge changes in Chinese and overseas capital markets in recent years, especially with China having already become a major source of public-offering companies. However, the above regulatory frameworks and related systems have never accordingly made adjustment to adapt to such changes, and thus became too obsolete to effectively cope with the increasingly complex and broad cross-border listing activities and moreover, can not satisfy China’s pursuit for an internationalized domestic capital market and stronger capital market competitiveness. This article is focused on China’s regulation of domestic companies’ indirect overseas listing, which has arisen much attention after the financial fraud debacle of China-based U.S. listed companies. The following three parts review and introduce the characteristics and key regulatory regimes of the regulatory framework at each of the three stages as defined in light of the regulatory framework’s formation and development history. In Part IV, I first analyze the historical background for the indirect overseas listing regulatory framework, and then make in-depth comments on its defects and deficiencies with reference to this financial fraud crisis of China-based companies. This part also gives a series of advice about the policies aimed at improving the regulation of indirect overseas listing. Finally I briefly look into the prospect of China's indirect overseas listing regulation and reach the conclusion.
I. THE ORIGIN OF THE REGULATORY FRAMEWORK
China began to implement the economic policies known as "Reforms and Opening-up" in late 1970s, and the promotion of the SOEs reform constitutes an important aspect of these policies. By the early 1990’s, the fundamental direction of the SOEs reform was clarified, i.e. to establish a modern enterprise system catering for the requirements of market economy, characterized by clearly established ownership, well defined rights and responsibilities, separation of enterprises from governmental administration, and scientific management. After the birth of the Shanghai Stock Exchange (SHSE) and the Shenzhen Stock Exchange (SZSE) in late 1990, the market for domestically listed foreign capital shares (B shares) was also created.Subsequently, a program aiming at supporting the overseas listing of joint-stock enterprises was enforced under the direct leadership of the PRC State Council (i.e. China’s highest organ of state administration). At that time, there are three main objectives that were pursued by the program: (i) to learn from the experience of mature securities markets; (ii) to promote the reform of SOEs and establish corporate governance for them; and (iii) to attract foreign funds which were scarce at that time. In the meantime, some industrial regulatory authorities under the PRC State Council and some local governments began to help SOEs explore the access to international capital market through overseas backdoor listing and overseas business restructuring. For example, in 1987, former Guangdong Enterprises (Holdings) Limited (current GDH Limited) acquired a controlling interest in a listed company on the Hong Kong Stock Exchange (HKEX), former Union World Development Company Limited (current Guangdong Investment Limited, HK: 0270); former China International Trust and Investment Corporation (current CITIC Group) bought a HKEX listed holding company, former Tylfull Company Limited (current CITIC Pacific Limited, HK: 0267) in early 1990; China State Construction Engineering Corporation (CSCEC) reorganized its overseas business and launched a subsidiary China Shipping Development Company Limited (HK: 0688) which was listed on the HKEX in August 1992. Brilliance China Automotive Holdings Limited (hereinafter Brilliance Automotive), a company incorporated in Bermuda, was successfully listed on the New York Stock Exchange (NYSE) on October 9, 1992. Brilliance Automotive is the first China-based company that was indirectly listed abroad after the accomplishment of an initial public issue of shares. The company underwent a complicated reorganization in preparation for the listing of its shares on the NYSE. As a result, a red-chip architecture was formed under which the China Foundation for the Development of Financial Education (established in the PRC Mainland) and Shenyang Jinbei Automotive Company Limited (SH: 600609) jointly held all the shares of Brilliance Automotive, and Brilliance Automotive held 51% of the equity interest of Shenyang Jinbei Bus Manufacturing Company Limited (incorporated in the PRC Mainland).Hereinafter, almost all China enterprises seeking to be indirectly listed on a foreign securities exchange adopted this operation mode of building the red-chip architecture before launching IPO.
At that time, China had no nationwide securities regulatory rules in place, and the PRC State Council had not established a securities regulatory authority yet. As a result, companies like Brilliance Automotive needed not obtain an approval from any domestic authority for their indirect overseas listing. After the establishment of the former State Council Securities Committee (SCSC) and the China Securities Regulatory Commission (CSRC) on October 12, 1992, the PRC State Council and relevant competent authorities including the former SCSC or the CSRC severally or jointly promulgated several regulatory documents, including: (i) Tentative Regulations on the Administration of Share
Issuance and Trading (hereinafter the Share Issuance and Trading Regulation); (ii) Circular of the PRC State Council on Further Enhancing the Macro-control of the Securities Market (GUOFA No. 68, hereinafter the Macro-control Circular); (iii) Circular on the Approval and Circulation of China Securities Regulatory Commission’s “Report on Issues Relating to the Overseas Public Offer of Shares and Listing of Domestic Enterprises” (ZHENGWEIFA No.18, hereinafter the SCSC Circular); (iv) Letter from the China Securities Regulatory Commission to the Hong Kong Securities and Futures Commission Concerning the Approval Procedure for Domestic Companies’ Overseas Issuance and Listing of Shares (hereinafter the CSRC’s Letter). These documents set for the first time the regulatory rules concerning domestic enterprises’ overseas listing. First, there may be two models for overseas listing, i.e. direct overseas listing and indirect overseas listing. The former means domestic companies’ direct overseas issuance and listing of shares (or the derivations of shares) on a foreign stock exchange, while the latter means the issuance and listing of shares on a foreign stock exchange by the overseas holding entity of domestic companies.Second, the fundamental regulatory principle is clarified that a domestic enterprise must obtain approval from the former SCSC before it directly or indirectly issue shares abroad or has its shares to be traded abroad.Third, the complexity of indirect overseas listing is accepted, and it is stipulated that the domestic firms planning to offer shares abroad and their overseas associates should report to the CSRC beforehand, and the CSRC is responsible for determining whether their cases need to obtain approval.Fourth, the legal responsibilities of domestic lawyers are defined. Specifically, domestic lawyers should include in their legal opinion letter for a domestic firm planning to offer shares abroad the judgment from the CSRC regarding whether the case needs to obtain approval; legal opinion letters without such information should be considered having material omissions and the lawyers should at least take the charge of failing to fulfill their due diligence responsibilities; legal opinion claiming no need to obtain the domestic approval shall be considered to include false statement, the lawyers should at least take the charge of securities-related fraud.
After the introduction of above policies, about thirty Chinese-based companies indirectly offered shares (incl. IPO and backdoor listing) on foreign securities exchanges, such as China Yuchai International Limited (NYSE: CYD), Shanghai Industrial Holdings Limited (HK: 0363), and Beijing Enterprises Holdings Limited (HK: 0392).The birth of Hang Seng China-Affiliated Corporations Index given by Hang Seng Indexes Company Limited in April 1997 marked the formation of a red-chip sector on the HKEX. Although the indirect overseas listing of above domestic firms gained support from the PRC State Council, related competent authorities under the PRC State Council or the local governments, there were some cases that domestic assets were transferred abroad without approval from the former SCSC or the CSRC. Moreover, just before the return of Hong Kong to the PRC, some Hong Kong investors’ wishful expectation of asset injection by the red-chip companies led to the overvaluation of some of the red-chip stocks, creating an adverse image for the red-chip sector. As such, the PRC State Council enacted the Circular of the State Council Concerning Further Strengthening the Administration of Share Issuance and Listing Overseas (GUOFA No. 21, hereinafter the Grand Red-chip Circular)which laid down some further requirements for overseas indirect listing.
Under the Grand Red-chip Circular, whether an overseas Chinese-invested company (either an overseas Chinese invested non-listed company or an overseas Chinese-holding listed company) should apply to the former SCSC for approval or for record keeping before the issuance and listing of shares abroad depends on the history of assets formation and the period of actual possession of such assets. With regard to the following two circumstances, a report shall be submitted to the CSRC for verification and then subject to the approval of the former SCSC, after obtaining consent in advance from the provincial government or the competent ministry under the PRC State Council based on its subordination thereto: (i) an overseas Chinese-invested company applies abroad for issuance and listing of shares with its domestic assets which are formed from its overseas assets invested in the PRC Mainland and have been in its actual possession for no more than three years; (ii) assets or equity interests of an domestic enterprise are to be transferred to an overseas Chinese-invested company by any means.With regard to the following two circumstances, the consent shall be obtained in advance from the provincial government or the competent ministry under the PRC State Council based on its subordination thereto, and an application shall be submitted to the CSRC for record afterwards: (i) an overseas Chinese-invested company applies abroad for issuance and listing of shares with its overseas assets; (ii) an overseas Chinese-invested company applies abroad for issuance and listing of shares with its domestic assets which are formed from its overseas assets invested in the PRC Mainland and have been in its actual possession for more than three years. Furthermore, the Grand Red-chip Circular stipulates that an application shall also be submitted to the CSRC for record afterwards when an overseas Chinese-holding listed company engages in activities such as capital-dividing for shares or increase in issuance of shares;and back-door listing of domestic companies is prohibited.The CSRC subsequently enacted the Circular on Certain Issues Concerning the Implementation of the “Circular of the State Council Concerning Further Strengthening the Administration of Share Issuance and Listing Overseas” (ZHENGJIAN No. 5) on February 27, 1998, to emphasize the above-mentioned regulatory policies and set out some specific requirements for the forms and contents of record application.Since then, the CSRC have ratified nearly sixty applications of indirect overseas listing put forward by Chinese companies.
With the clarification of the regulatory policies of indirect overseas listing, the regulatory framework for direct overseas listing was established from scratch. In accordance with Article 85 of the PRC Company Law (1993), the PRC State Council enacted the Special Provisions of the State Council on the Floatation and Listing Abroad of Stocks by Joint-stock Limited Companies (hereinafter the Special Provisions on Direct Overseas Listing) ; In accordance with the Special Provisions on Direct Overseas Listing, the SCSC, the CSRC and relevant competent authorities severally or jointly promulgated several other regulatory documents that lay down specific requirements for H-share companies on issues such as the corporate governance, on-going disclosure obligations, foreign exchanges control, reduction of state stockholding and the centralized registration and deposit of unlisted shares.It can be seen from these efforts that the Chinese regulatory authorities have been enforcing separate regulation for direct and indirect overseas listing ever since such activities began.
In addition, it is worth noting that, to comply with applicable domestic laws, the pre-operational stage (i.e. establishing a special purpose vehicle (SPV) abroad and entitling such an entity to the controlling interest of a domestic company) of Chinese companies’ indirect overseas listing involves the regulation of three aspects, i.e. foreign direct investment, absorption of foreign investment and foreign capital import and export. According to the laws and regulations in force at that time, to be allowed to establish an overseas SPV, and to have such an entity obtain the controlling interest of a domestic company or establish a foreign-invested company in China, the domestic companies must obtain approval from business regulatory authorities and go through related registration at foreign exchange administrative authorities.The above review and registration processes were mainly performed by provincial authorities of business administrationor by provincial branches of the SAFE.
II. THE DUAL-TRACK REGULATORY FRAMEWORK
In 1998, China's first comprehensive securities legislation, the PRC Securities Law (1999), was given birth. Article 29 of the PRC Securities Law (1999) stipulates that: “……A domestic enterprise must obtain approval from the China Securities Regulatory Commission before it directly or indirectly issue shares abroad or has its shares to be traded abroad.”This is the first time that China’s highest legislature recognized through legislation that it requires approval from the CSRC for either direct or indirect overseas listing to take place. At that time, the increasingly strong private economy had fostered some relatively mature private companies which began to demand financing through capital market. From early 1998 to early 1999, Chinese enterprises including Hengan International Group Company Limited (HK: 1044), Eagles Brand Holdings Limited (SP: EBH) and Qiao Xing Universal Telephone, Inc. (NASDAQ: XING)issued shares and got listed on foreign securities markets one after another. These companies are holding companies that engage their business principally in the PRC Mainland, and their issuance and listing of shares abroad did not go through the review and approval procedure of the CSRC. At the end of 1999, however, the indirect overseas listing of Yuxing InfoTech Holdings Limited (incorporated in Bermuda, HK: 8005, hereinafter Yuxing InfoTec)aroused great attention of the CSRC, which directly led to its establishing the regulatory rules governing the indirect overseas listing of non-SOEs, hence marking the formation of a dual-track regulatory framework governing the listing matters of grand red-chip and small red-chip companies.
In 1999, the Chinese citizen, Mr. Zhu Wei Sha joined hands with other three founders to create Yuxing InfoTec, and then they set up a red-chip structure in which Yuxing InfoTec held the controlling interest in Golden Yuxing Electronics and Technology Company Limited (a Sino-foreign co-operative joint venture enterprise incorporated in the PRC Mainland, hereinafter Golden Yuxing) and Mr. Zhu Wei Sha was the actual controller.As interpreted by the law firm in charge of providing legal opinions about Yuxing InfoTec’s overseas share issuance and listing, given the fact that the actual controller of the company was a natural person, Yuxing InfoTec should not belong to the category of overseas Chinese-invested non-listed companies as defined in the Grand Red-chip Circular, and thus it was not obliged to obtain the CSRC approval for its overseas listing matters. Yuxing InfoTec subsequently passed the listing hearing of the HKEX, finished the share offering in November 1999 and planned to go listed on December 8, when the CSRC delivered its order that the company should halt its overseas listing procedure. On the one hand, the CSRC believed that despite having been incorporated abroad, Yuxing InfoTec was essentially a Chinese company given its operating activities conducted in the PRC Mainland. On the other hand, since the Guidelines for Listing on the Hong Kong GEM already put into force on September 21, 1999 required domestic companies to obtain the approval from the CSRC before their listing on the Hong Kong GEM, Yuxing InfoTec’s indirect overseas listing without the CSRC approval may constitute circumvention of regulation. Therefore, the CSRC deemed it necessary for the company to obtain its approval before going listed abroad. Having learned this, Yuxing InfoTec went through the procedure required by the CSRC, obtained its approval for overseas listing on January 17, 2000, and became the first domestic private company listed on the Hong Kong GEM on January 31, 2000.While processing this case, the CSRC circulated its criticism on the above mentioned law firm and the related lawyers.
After the Yuxing InfoTec case came to an end, the CSRC began to devise common rules to specifically regulate Chinese private companies’ indirect overseas offering and listing of shares. The CSRC enacted in 2000 the Circular on Relevant Issues Concerning the Overseas Issuance and Listing of Shares by Foreign Companies Involving Domestic Equity (ZHENGJIANFAXINGZI No. 72, hereinafter the Small Red-chip Circular), establishing the so-called “no-action letter system”. According the Small Red-chip Circular, if the issuance and listing of shares by foreign companies involving domestic equity falls within the Grand Red-chip Circular, the matter should continue to be handled in accordance with the Grand Red-chip Circular. Obviously, the Small Red-chip Circular is applicable to indirect overseas listing of non-SOEs as opposed to the Grand Red-chip Circular applicable to indirect overseas listing of SOEs.As for substantial provisions, the Small Red-chip Circular requires that one foreign company involving domestic equity can only issue and list of its shares on two conditions, i.e. the domestic lawyer submits the legal opinions to the CSRC and the CSRC replies to the domestic lawyer with no objection following the review procedure. The above-mentioned legal opinions shall include, but not limited to, the following contents: (i) the general information of the foreign company and this issuance and listing of shares; (ii) where domestic institutions or citizens hold, directly or indirectly, the equity of the foreign company, the process of the formation and evolution of those equity shall be explained in detail, together with the opinion on their legitimacy and validity; (iii) where listed assets of the foreign company involve, directly or indirectly, domestic equity, the process of the formation and evolution of those equity shall be explained in detail, together with the opinion on their legitimacy and validity; (iv) explanation on the business of the domestic enterprises whose equity is held, directly or indirectly, by the foreign company, together with the opinions on its conformity with China’s industrial policy on foreign direct investment and other relevant laws and regulations.It can be seen from the above regulations that the CSRC’s verification of domestic legal opinions focuses on the legitimacy and validity of the process of formation and evolution of domestic assets, and does not make judgment on the essence of overseas listing.
The Small Red-Chip Circular well defined the domestic verification and approval procedures prior to indirect overseas listing of Chinese non-SOEs, which has its positive meanings on the following two aspects. On the one hand, the Small Red-chip Circular serves as the guidance for the implementation of Article 29 of the PRC Securities Law (1999), requiring all foreign companies involving domestic equity to be reviewed by and obtain the approval of the CSRC before offering and listing of shares abroad. This makes up for the loophole in the regulation of non-SOEs’ indirect overseas listing after the Grand Red-chip Circular was implemented in 1997. On the other hand, the CSRC’s verification of domestic legal opinions is helpful for overseeing the lawful operation as well as the equity and asset restructuring of related domestic companies, along with preventing domestic assets (especially state-owned assets) from being illegally transferred abroad. However, there are deficiencies inherent to the no-action letter system. That is, the no-action letter’s nature of administrative license as implied by its status as a prerequisite for a foreign company’s overseas listing is in conflict with the stipulation of the PRC Administrative License Law (2003)with regard to the power to establish an administrative licensing item.More crucial is the tendency that overseas investors will become over-confident about the legitimacy and compliance of domestic companies’ operation if the CSRC conducts some degree of verification on their indirect overseas listing and issues a no-action letter. As a result, once domestic companies commit violations of related regulations (e.g. disclosure of false information) that are harmful to investors’ interest in the process of their overseas listing, it is unavoidable that the related securities services intermediaries will use the no-action letter as an excuse to evade their legal liabilities. Obviously, the no-action letter issued by the CSRC should not function as a credit guarantee, and in light of such concerns, the CSRC took two measures when devising the no-action letter system to dilute its quality as an administrative license. On the one hand, the CSRC requires the domestic law firms to apply for the no-action letter instead of the foreign companies involving domestic equity or the domestic companies held by them; And on the other hand, in the case of no action to domestic legal opinions, the CSRC’s reply is not issued in its own name, but in the name of one of its internal organs—the Legal Department, and the reply is sent to the domestic law firms instead of the foreign companies or the domestic companies held by them. Besides, the wording used in the majority of no-action letters is “no objection” instead of “consent” or “approval”.Nevertheless, the 2002 event of false information disclosure by Euro-Asia Agricultural (Holdings) Company Limited (HK: 0932, hereinafter Euro-Asia Holdings) still intensified the controversy and concerns from all parties involved over the no-action letter system.In view of the many legal defects of the no-action letter system, the CSRC announced its revocation on April 1, 2003 upon approval by the PRC State Council.As of that time, the CSRC had issued over 200 no-action letters for indirect overseas listing of Chinese non-SOEs.
It is necessary to note that the internet stocks began to be popular among overseas investors around 2000 after the internet technologies had considerably developed. Chinese-based value-added internet service providers, including SINA.com (NASDAQ: SINA), NetEase.com, Inc. (NASDAQ: NTES), and Sohu.com Inc. (NASDAQ: SOHU), were listed in the U.S. one after another. Constrained by China’s foreign capital utilization policies, instead of having an overseas SPV obtain the controlling interest in the domestic company, those companies above adopted a model called variable interest entity (VIE, commonly known as “SINA model” or “VIE model”), that is, arranging a series of contracts concerning business cooperation, the right to license, and business agency between the foreign-invested domestic company held by the overseas SPV and the domestic company whose main business is in the area restricted to domestic capital, so as to transfer the operating revenue and profits earned by the latter to the former.Since then, VIE model gradually became the mainstream equity restructuring model used by domestic private companies involving industries closed to foreign capital before their indirect overseas listing.
During this period, in addition to the dual-track model adopted in regulation of indirect overseas listing, China gradually established a regulatory model treating grand red-chips and small red-chips differently in the preliminary steps for indirect overseas listing. These preliminary steps include direct investment abroad, financing through indirect overseas listing and the related foreign exchange administration. For example, the old policies only required the domestic companies to obtain approval from related competent authorities and go through foreign exchange registration when establishing companies abroad through direct investment, whereas such approval and registration were not mandatory for domestic natural persons seeking to establish companies abroad through direct investment.In fact, most Chinese private enterprises seeking indirect overseas listing adopted the corporate structure in which domestic natural persons directly hold overseas SPVs when reorganizing their equity structures. It is obvious that the above approval and registration are mainly suitable for grand red-chip companies. For another example, the SAFE independently or jointly with the CSRC issued several regulatory documents that require the grand red-chip companies to register for foreign exchange from issuance of shares abroad, and provide stipulations on the procedure of opening special overseas foreign exchange accounts and the time limit for transferring the funds raised abroad back to China.The related competent authorities did not give specific stipulations on the foreign exchange administration pertaining to small red-chip companies’ overseas financing.
Furthermore, it is worth mentioning that the MOFCOM, the State Administration of Taxation (SAT), the State Administration for Industry and Commerce (SAIC) and the SAFE jointly enacted in 2003 the Interim Provisions on Mergers with and Acquisitions of Domestic Enterprises by Foreign Investors (hereinafter the Provisions on Mergers and Acquisition (2003)). Despite the primary objective to standardize mergers with and acquisitions of domestic enterprises by foreign investors, the Provisions on Mergers and Acquisition (2003) have significant implications on regulation over indirect overseas listing as foreign SPV’s obtaining the controlling interest of domestic enterprises is a necessary preliminary step for most domestic companies’ indirect overseas listing. First, these provisions are applicable for both foreign investors and the domestic acquisition targets regardless of their ownership (whether state-owned or private), which laid some degree of foundation for unifying the regulations of small red-chips and grand red-chips from the angles of overseas investment and absorption of foreign investment. Second, the term “merger with and acquisition of domestic enterprises by foreign investors” is clearly defined. “Merger with and acquisition of domestic enterprises by foreign investors” shall be accomplished by means of “equity merger and acquisition” or “asset merger and acquisition”. The former means a foreign investor purchases the equities of the shareholders of a non-foreign-invested enterprise in the PRC Mainland (hereinafter a Domestic Company) by agreement or subscribes to the capital increase of a Domestic Company, so as to convert and re-establish the Domestic Company as a foreign-invested enterprise, while the latter means a foreign investor establishes a foreign-invested enterprise and purchases by agreement and operates the assets of a domestic enterprise through that enterprise, or, a foreign investor purchases the assets of a domestic enterprise by agreement and establishes a foreign-invested enterprise with such assets to operate the assets.Third, the competent authority for the review and approval of the establishment of a foreign-invested enterprise upon merger and acquisition is clarified. The application of establishing a foreign-invested enterprise upon merger and acquisition shall generally be vetted and approved by the competent authority in charge of foreign trade and economic cooperation at provincial level; if the foreign-invested enterprise established upon merger and acquisition is of a particular type or industry, the former MOFTEC shall be the competent authority for the review and approval.Fourth, the standard for the consideration of a merger and acquisition, as well as the regulatory requirements for the payment of such consideration are stipulated. The parties to a merger and acquisition shall determine the transaction price on the basis of the appraisal result of an domestic asset appraisal institution on the value of the equities to be transferred or the assets to be sold; if a foreign investor uses the shares over which he has the right of disposal or the Renminbi-denominated assets legally owned by him as means of payment, such payment shall be subject to verification and approval of the foreign exchange control authorities.In general, the Provisions on Mergers and Acquisition (2003) did not set notably more stringent requirements on the review and approval of establishing overseas SPVs and overseas SPVs’ obtaining the controlling interest in domestic companies.
III. THE RE-ESTABLISHMENT OF REGULATORY FRAMEWORK
Domestic companies were no longer required to obtain the CSRC’s approval for their indirect overseas listing after the no-action letter system was repealed. Therefore, the lowered compliance cost ushered in a boom of indirect overseas listing of Chinese private companies. From 2003 to 2004, a total about 120 Chinese private companies were indirectly listed abroad, raising a total fund of nearly US$ 3 billion. However, there were worries hidden behind the prosperity. The foreign-capitalization of private enterprises through indirect overseas listing induced problems such as capital flight, asset loss (especially state-owned assets) and 'disguised' foreign capital. The related competent authorities under the PRC State Council were very concerned about these problems and launched the re-establishment of the regulatory framework, aiming at strengthening the regulation of overseas investment and absorption of foreign investment from the angles of M&A by foreign capital and foreign exchange control.
The first breakthrough of the above-mentioned regulatory framework re-establishment was in the area of foreign exchange control. On January 24, 2005, the SAFE issued the Circular of the State Administration of Foreign Exchange on Issues Concerning Improvement in the Administration of Foreign Exchange in Connection with Mergers and Acquisitions by Foreign Investors (HUIFA No. 11, hereinafter the No. 11 Foreign Exchange Administration Circular). First, the No. 11 Foreign Exchange Administration Circular establishes a requirement for the foreign exchange control related to the establishment of SPVs. Domestic residents who invest abroad and directly or indirectly establish or control enterprises abroad shall carry out approval and registration procedures with reference to the Provisions Regarding the Foreign Exchange Control for Investments Abroad (hereinafter the Foreign Exchange Control Provisions). Second, the No. 11 Foreign Exchange Administration Circular establishes a foreign exchange control requirement for SPVs’ round-tripping investment. If a Chinese resident wishes to obtain an instrument of equity or other property right in a foreign company by selling domestic assets or equity, he/she is required to obtain the verification of the foreign exchange administration. Without verification, a Chinese resident may not use his/her domestic assets or equity as consideration for equity or other property right in a foreign enterprise. Third, the No. 11 Foreign Exchange Administration Circular raises the level of competent authorities for the foreign exchange registration related to SPVs’ round-tripping investment. Any application for foreign exchange registration from a foreign-invested enterprise established by a Chinese resident through the merger or acquisition of a domestic enterprise by a foreign enterprise shall be approved by the SAFE.
Subsequently, in order to define the scope of the No. 11 Foreign Exchange Administration Circular, the SAFE issued on April 21, 2005 the Circular on Relevant Issues of Registration of Overseas Investments Contributed by Domestic Individual Residents and Foreign Exchange Registration of Merger or Acquisition with Foreign Investments (HUIFA No. 29, hereinafter the No. 29 Foreign Exchange Administration Circular). According to the No. 29 Foreign Exchange Administration Circular, “foreign exchange registration for foreign-invested enterprise established upon merger and acquisition with foreign investment” and “foreign exchange registration for merger and acquisition with foreign investment” referred to in the No. 29 Foreign Exchange Administration Circular shall include the following circumstances: (i) the establishment of a foreign-invested enterprise by a foreign investor in the PRC Mainland; (ii) the purchase of the equities of a Chinese party in a foreign-invested enterprise by a foreign investor; (iii) the purchase of the equities of a Chinese party in a Chinese-funded enterprise by a foreign investor; (iv) the capital increase of a domestic enterprise (either a foreign-invested enterprise or a Chinese-funded enterprise) by a foreign investor. In detail, under the following three circumstances, the obligation of foreign exchange registration for the establishment of a foreign-invested enterprise by a foreign investor in the PRC Mainland shall be fulfilled: (i) a foreign investor establishes a foreign-invested enterprise in the PRC Mainland, and agrees to purchase and operate the assets of a domestic enterprise through such foreign-invested enterprise; (ii) a foreign investor agrees to purchase the assets of a domestic enterprise and invests in establishing a foreign-invested enterprise by such assets for the operation thereof; (iii) a foreign investor newly establishes a foreign-invested enterprise in China, and agrees to control another enterprise in the PRC Mainland or holds any right to the revenue or franchise operation of a particular asset through such foreign-invested enterprise. Such foreign exchange registration items may be “foreign exchange registration for the foreign-invested enterprise”, “foreign exchange registration alteration for the foreign-invested enterprise”, and “foreign exchange registration for overseas investment in which foreign exchange funds are received for the transfer of equities”. Meanwhile, it is emphasized by the No. 29 Foreign Exchange Administration Circular that individual residents that have not completed the foreign exchange registration shall not be allowed to make overseas investment or undertake foreign exchange business in capital items.
The No. 11 Foreign Exchange Administration Circular and the No. 29 Foreign Exchange Administration Circular established clear foreign exchange control requirements for the preliminary steps of domestic non-SOEs’ indirect overseas listing, which increased the compliance costs for the regulated firms and thus de facto constrained the indirect overseas listing activities to some degree. Such situation is obviously unfavorable to the financing of non-SOEs (especially the high-tech enterprises) through international capital market. Moreover, the No. 11 Foreign Exchange Administration Circular and the No. 29 Foreign Exchange Administration Circular did not give rise to a uniform and complete foreign exchange control system as they were applicable only to domestic individuals’ overseas investments and the foreign exchange control items involved in mergers and acquisitions by foreign capital, but were not applicable to those involved in overseas investments of domestic institutions and round-tripping investments. As such, the SAFE issued on October 21, 2005 the Circular on Relevant Issues Concerning Foreign Exchange Administration for Domestic Residents to Engage in Financing and in Round-tripping Investment via Overseas Special Purpose Vehicles (HUIFA No. 75, hereinafter the No. 75 Foreign Exchange Administration Circular). The No. 75 Foreign Exchange Administration Circular became effective as the date of November 1, 2005 and repealed the No. 11 Foreign Exchange Administration Circular and the No. 29 Foreign Exchange Administration Circular. Different from the No. 11 Foreign Exchange Administration Circular and the No. 29 Foreign Exchange Administration Circular, the No. 75 Foreign Exchange Administration Circular regulates the domestic residents’ cross-border capital trades as well as the investing and financing activities via overseas SPVs specifically from the angle of foreign exchange administration. In addition, the No. 75 Foreign Exchange Administration Circular established a uniform foreign exchange control system for the financing and round-tripping investment of domestic natural persons and legal persons via overseas SPVs.Furthermore, the No. 75 Foreign Exchange Administration Circular for the first time clearly defines the concepts such as “round-tripping investment”, “SPV”, and “control” which play an important role in the regulation of indirect overseas listing.
Specifically, the No. 75 Foreign Exchange Administration Circular establishes the following requirements for foreign exchange control. First, a domestic resident shall, before establishing or controlling an overseas SPV, apply for going through the procedures for foreign exchange registration of overseas investments; Second, a domestic resident shall apply for going through the foreign exchange registration regarding the owners’ equity of the SPV he holds and its changes, if he wishes to inject assets of a domestic company owned by him to the SPV or to conduct overseas equity financing after injecting domestic equity or assets to the SPV. Third, an SPV undergoing material capital changes that do not involve round-tripping investment shall apply for going through the procedure of foreign exchange registration regarding overseas investment or the procedure of putting the changes on record.On November 24, 2005, the SAFE's Department of General Affairs established some implementing rules for the No. 75 Foreign Exchange Administration Circular, to specify the application documents of foreign exchange registration, general principles and key points of vetting, and the scope of authorization by the SAFE to its subsidiaries.It is stipulated by this document that SAFE’s subsidiaries at provisional level is generally in charge of the foreign exchange registration related to the establishment or control of enterprises abroad, except that the SAFE is in charge of the foreign exchange registration related to the establishment or control of enterprises abroad by domestic SOEs; SAFE’s subsidiaries at provisional level is also responsible for the foreign registration related to the establishment, or merge with or acquisition of domestic enterprises by overseas SPVs. In general, the No. 75 Foreign Exchange Administration Circular’s stipulations on foreign exchange registration are clear and reasonable, and the related implementing procedures are specific and complete. In particular, it is stipulated by this circular that the foreign exchange registration procedures involved in the preliminary steps of private enterprises’ indirect overseas listing are handled only at SAFE’s subsidiaries at provincial level, which provides some convenience and is helpful for reducing the financing costs in connection with indirect overseas listing. As a result, some practitioners view the No. 75 Foreign Exchange Administration Circular as an important mark of “the red-chip gate’s reopening”.
In less than one year, however, material changes occurred in indirect overseas listing regulatory policies and the regulatory framework also began to shift to cooperation among multiple competent authorities and interrelation between regulatory powers. On August 8, 2006, the MOFCOM, the State-owned Assets Supervision and Administration Commission (SASAC), the SAT, the SAIC, the SAFE and the CSRC jointly issued the Provisions on Mergers with and Acquisitions of Domestic Enterprises by Foreign Investors (hereinafter the Provisions on Mergers and Acquisition (2006) which came into effect on September 8, 2006.This new document established more stringent regulatory requirements on the three operational steps involved in indirect overseas listing. First, where a domestic company sets up an overseas SPV, it shall apply to the MOFCOM for vetting and approval.Second, where the merging company is a related party or an SPV seeking to carry out equity merger with or acquisition of a domestic enterprise, it shall apply for vetting of the MOFCOM. Article 11 of the Provisions on Mergers and Acquisition (2006) stipulates that “domestic enterprises or natural persons shall, when they, in the name of the overseas companies legally established or controlled by them, merge with or acquire domestic companies that are related parties, apply to the MOFCOM for approval; this requirement shall not be circumvented by means of domestic investment of the foreign-invested enterprises or otherwise”. Article 32 requires that an equity merger with or acquisition of a domestic company by a foreign investor shall approved by the MOFCOM. The previous procedure in which the competent departments in charge of business at provincial levels will conduct examination and approval process for domestic enterprises’ establishing companies abroad and foreign investors’ establishing foreign-invested enterprises through mergers with and acquisitions of domestic companies was herein changed. As a result, the investment administration involved in the preliminary operational steps of indirect overseas listing was all concentrated to the level of the MOFCOM, a higher authority in charge of related vetting. Third, Article 40 of the Provisions on Mergers and Acquisition (2006) stipulates that the overseas listing of SPVs shall be approved by the CSRC, which implies the reinforcement of the requirement set by Article 238 of the PRC Securities Law (2005 Revision) that a domestic enterprise must obtain approval from the CSRC as for its direct or indirect overseas listing. Fourth, the approval requirement for the merger with or acquisition of domestic enterprises by foreign SPVs after their overseas listing is put forward. The merger with or acquisition of a domestic company by an overseas listing company using cash to pay shall be approved by the MOFCOM or the competent department in charge of business at provincial level. If the consideration is paid by equity, the MOFCOM shall be the competent authority for approval.Fifth, the time limit for the completion of overseas listing of an SPV after the equity merger and acquisition is clearly stipulated. After the obtainment of MOFCOM’s approval for the equity merger with and acquisition of domestic enterprises by the overseas SPV, MOFCOM’s approval for a foreign investment enterprise, and CSRC’s approval for the overseas listing of shares by the overseas SPV, the domestic enterprises may apply to the company registry for the business license for a foreign investment enterprise. Within one year as of the issuance of the business license, the overseas SPV shall complete the listing procedure and report to the MOFCOM the situation of overseas listing and the proposal of financing income retrieval, otherwise MOFCOM’s approval for a foreign investment enterprise shall be automatically invalidated, and the equity structure of the domestic company shall be restored to the status before the equity merger and acquisition.
It is noteworthy that, though the Provisions on Mergers and Acquisition (2006) did not expressly specify to which situations of foreign investors’ mergers with and acquisitions of domestic SOEs the provisions should apply, in view of practice, these provisions are widely applicable to indirect overseas listing of Chinese SOEs and private enterprises.However, this did not essentially change the dual-track regulatory framework with regard to grand red-chips and small red-chips, because the Grand Red-chip Circular and the Provisions on Mergers and Acquisition (2006) should simultaneously apply to grand red-chip companies’ listing while the CSRC’s regulatory duties set by these two normative documents are not identical. According to the former, the CSRC should oversee the injection of domestic assets into overseas Chinese-invested companies (including the assets injected before and after an overseas IPO) as well as the overseas listing of overseas Chinese-invested companies, but according to the latter, the CSRC , , , can only conduct vetting for overseas listing of the SPVs. Obviously, as compared to the Grand Red-chip Circular, the Provisions on Mergers and Acquisition (2006) entitles the CSRC to smaller regulatory power.
After the Provisions on Mergers and Acquisition (2006) became effective, the CSRC published a list of documents for SPV’s overseas listing application in March 2007.Among the list, a more stringent regulatory requirement is put forward by the CSRC. Where the domestic enterprise plans to list on foreign stock exchange’s main board, the audit reports for the previous three years shall be submitted. For listing on foreign stock exchange’s growth enterprise board (GEB), the audit reports for the previous two years shall be submitted. In essence, the above stipulations require domestic enterprises not to apply for indirect overseas listing until their operation has lasted for a certain number of years.
While the MOFCOM and the CSRC were strengthening their regulation of indirect overseas listing, the SAFE also put forward more stringent regulatory requirements on the foreign exchange administration involved in the preliminary steps of indirect overseas listing. On August 4, 2007, the SAFE's Department of General Affairs issued the Circular of the SAFE's General Affaires Department on the Implementing Rules of the “Circular on Relevant Issues Concerning Foreign Exchange Administration for Domestic Residents to Engage in Financing and in Round-tripping Investment via Overseas Special Purpose Vehicles” (hereinafter the Implementing Rules on Foreign Exchange Administration (2007)) which came into force on the date of promulgation.
Compared to the Implementing Rules on Foreign Exchange Administration (2005), the Implementing Rules on Foreign Exchange Administration (2007), in the Part “KEY POINTS OF VETTING”, provides extremely strict requirements for foreign exchange registration. For example, as for the foreign exchange registration for the transfer of domestic assets or equity interests to a newly incorporated SPV by the domestic resident, the applicant shall explain the financial position for previous three years in the business and financing plan. As for the level of competent authorities, SAFE’s subsidiaries at the provisional level shall be responsible for the foreign exchange registration related to domestic natural person residents, and the SAFE is in principle charge of the foreign exchange registration related to domestic legal person residents.Another example, as for the foreign exchange registration of the establishment or control of overseas SPVs, where the foreign investor is a foreign enterprise that completes foreign exchange registration of investment abroad but has not maintain continuing operation within the endorsed scope of business for three years, the application for the foreign exchange registration of the establishment, or the merger with or acquisition of domestic enterprises shall be refused.These requirements de facto provide a precondition for the application of foreign exchange registration that the overseas SPV or related domestic enterprises shall maintain continuing operation for at least three years.
Though the Provisions on Mergers and Acquisition (2006) and the Implementing Rules on Foreign Exchange Administration (2007) significantly increased the compliance costs on each operational step of domestic enterprises’ indirect overseas listing, they are jointly implemented by the competent authorities such as the MOFCOM, the CSRC and the SAFE, and indeed helpful for the regulation of domestic companies seeking to be listed abroad. In this sense, these two regulatory documents have certain positive implications. It is regretful that there has been no approval issued by the MOFCOM or the CSRC for domestic private enterprises’ establishment of overseas SPVs, cross-border merger and acquisition between related parties, and indirect overseas listing. More ironically, a large group of domestic private enterprises realized indirect overseas listing upon building a red-chip structure through various means such as “borrowing” existing equity structure, warehousing of shares and the VIE model, to evade the vetting requirements set by the Provisions on Mergers and Acquisitions (2006). According to related statistics, there have been over 400 domestic private enterprises that accomplished indirect overseas listing from early 2007 to June 30, 2011. In addition, the small red-chip companies tend to go publicly listed at diversified locations abroad, as evidenced by the presence of China-based companies not only in the traditional stock exchanges such as in Hong Kong, Singapore, New York, but also in Frankfurt, London and Korea.
IV. FURTHER ANALYSIS AND OUTLOOK
A. Analysis of the historical background
It can be seen from the above parts that China's indirect overseas listing regulatory framework has been developed from scratch and become more and more complex. Independent from the regulatory framework for direct overseas listing, this regulatory framework has a dual-track system providing separate oversight rules for the listing of grand red-chip and small red-chip companies, that is, the Grand Red-chip Circular and the Provisions on Mergers and Acquisition (2006) are both applicable to the grand red-chip companies while only the latter is applicable to the small red-chip companies. Fairly speaking, the history of this regulatory framework is closely related to the evolution of China’s and international capital market environment. In early 1990s, China’s securities market was still in its primary stage, and as a result of the one-sided understanding of joint-stock system and the functions of securities market, the overseas listing of domestic enterprises was endowed with great implications: (i) attracting foreign investors and absorbing foreign capital to promote the transformation of SOE operating mechanism; (ii) learning from other countries’ experiences in developing securities market; (ii) functioning as an important aspect of the Chinese securities market’s opening to the external world. Consequently, the Chinese government selected a few SOEs to be listed abroad for the sake of maintaining the image of Chinese enterprises and strengthening foreign investors’ confidence.Just before the return of Hong Kong, some domestic enterprises transferred assets abroad and went through indirect overseas listing without approvals, which might cause loss of state-owned assets, damaged the image of Chinese SOEs and weakened the foreign investors’ confidence about Chinese companies. Under such circumstances, the PRC State Council promulgated the Grand Red-chip Circular of which the core aim is to prevent the loss of state-owned assets. From the angle of system design, the Grand Red-chip Circular stipulates that in the case of indirect overseas listing with domestic assets, if the asset formation process is unrelated to overseas assets, the regulation should always be as strict as possible; if the domestic assets were derived from foreign investments in the PRC Mainland, the regulation can be relatively flexible and regulatory requirements of different strictness levels shall be put forward in accordance with whether the assets have been held by three years or longer.
Though China’s private economy has gradually grown strong by late 1990s, without substantive changes of China’s securities market, multiple factors considerably limited the willingness and feasibility of private companies’ domestic equity financing, hence forcing them to seek help from overseas capital market. First, the duties to service the reform of SOEs assigned to China’s securities market had not been fulfilled, and the ownership discrimination exists de facto so widely that there is hardly any opportunity for private enterprises to approach domestic securities market. Compared to the foreign developed multi-level capital markets that can better meet the financing needs of enterprises, the structure of China’s securities market was fairly simple. At that time, the Small and Medium Enterprise Board (SME Board) and the GEB had not been created and the financing needs of enterprises with different sizes and at different development stages could therefore hardly be duly satisfied. At the meantime, the overseas capital markets had already been equipped with multi-level capital platforms including the main board, the GEB and the OTC market, facilitating the financing for SMEs and growth enterprises. Third, compared to the flexible listing conditions in foreign advanced stock exchanges, the requirements for IPO and listing domestically are more stringent. For example, Article 33 of the Regulatory Rules for Initial Public Offerings and Listing of Sharesstipulates that the requirements for an issuer's IPO shall include but not limited to the following: (i) having a positive net profit of over RMB 30 million accumulatively within the latest three accounting years; (ii) having a net cash flow of over RMB 50 million accumulatively, or having a business income of over RMB 300 million accumulatively within the latest three accounting years. These conditions are considerably higher than those required by the stock exchanges on which overseas-listed Chinese companies are concentrated.Fourth, China’s regulations of securities market lack alternatives in many aspects, whereas the overseas regulations are more flexible and provide more room for the enterprises to realize their interests. For example, before April 2005, the so-called phenomena “equity division” was very common for almost all China's domestic listing companies, i.e. the shares of a listing company were categorized as tradable shares and untradeable shares. The shares of a listing company issued before its IPO were regarded as untradeable shares that cannot be traded on domestic stock exchanges. Obviously, there was no smooth exit for private equity investment in a listed company, and the value of the shares held by initiators could not be fully realized. For another example, prior to 2006, the listed companies were prohibited from implementing equity incentives, which hampered their ability to attract and retain high-level management personnel, and core technical and business staff, as well as hindered the establishment of a sound incentive and constraint mechanism.Fifth, the transparency and efficiency of regulation and investors maturity of China’s securities market are also far behind those of the advanced securities markets. Moreover, under the influences of domestic regulatory policies, even choosing direct overseas listing, the private enterprises will still face the practical obstacles such as “ownership discrimination”, un-tradable shares, prohibition of equity incentives and inefficient financing.In this market environment, the Chinese government has the following attitudes towards indirect overseas listing: on the one hand, indirect overseas listing is primarily positive to development of private enterprises in a way that it can help them fully and efficiently absorb foreign investments, but an issue that cannot be ignored is whether the preliminary steps of indirect overseas listing are fully compliant and may cause loss of state-owned assets; on the other hand, though the PRC Securities Law (1999) had established principles governing the regulation of indirect overseas listing, without experience in regulation of cross-boarder listing and enough determination, the CSRC was not adequately confident about providing effective regulation of this matter, and thus had to employ the way of learning by doing. As such, it is understandable that the CSRC swiftly enacted the Small Red-chip Circular and did very much work to reduce the quality of administrative license inherent in the no-action letter system right after the Yuxing InfoTech event.
After the no-action letter system was repealed, the problems inherent in the indirect overseas listing of massive private companies upon foreign-capitalization like capital flight and the overseas loss of interest in domestic assets became increasingly prominent. First, China carried out a thorough amendment for the PRC Company Law (2004 Revision) and the PRC Securities Law (2004 Revision) in 2005, and on this basis, the CSRC strengthened the legislation, revision and revocation of securities regulatory laws, thus achieving large improvement in the regulatory system, as well as in the publicity and transparency of the regulatory enforcement. Second, the reform of domestic listed companies’ equity division rapidly progressed from April 2005 and was largely completed by the end of 2007, which marks “the confluence between the basic systems of the Chinese and the world’s capital markets.”Third, with approval from the CSRC, the SZSE opened the relatively independent SME board in the main board market in May, 2004 and established the GEB independent from the main board market in May 2009, for the purpose of providing financing platforms for the many SMEs and ventures with strong growth and innovative capacities. These actions enriched the levels and structure of China’s securities market and expanded its depth and broadness. Fourth, along with the progress of SOEs’ restructuring and listing, in recent years, the listing resources provided by SOEs to the domestic securities market have been decreasing. To attract the potential listing resources, the competition between overseas stock exchanges and between the overseas and the domestic stock exchanges has intensified, exerting some degree of pressures on China’s objective to enhance its securities market competitiveness and adjustment of overseas listing regulatory policies.Moreover, China has enjoyed surplus of international current account and capital account in each year since 2003, and the foreign exchange inflow under capital account increased the difficulty and complexity of designing and executing monetary policies.Just in the context as described above, the Chinese government shifted its attitude towards indirect overseas listing to a significantly different point of regarding it primarily as a source of negative impacts, and began to consider it necessary to limit indirect overseas listing. Moreover, the arrangement to assign the competent authorities in charge of business at provincial level and the SAFE agencies at provincial level the duty to regulate the preliminary steps of indirect overseas listing is not conducive to a thorough and uniform oversight of the outflow of interests in domestic assets as well as the overall position of foreign exchange inflow and outflow. To solve such problems, the SAFE enacted the No.75 Foreign Exchange Administration Circular on the basis of the No. 11 Foreign Exchange Administration Circular and the No. 29 Foreign Exchange Administration Circular, and the MOFCOM, the CSRC and the SAFE, together with other three competent authorities, jointly enacted the Provisions on Mergers and Acquisition (2006), hence establishing a regulatory mechanism based on multi-ministry cooperation under the PRC State Council.
B. Defects and deficiencies
The advantage of the current indirect overseas listing regulatory framework is that it covers all operational steps of the indirect overseas listing process, including establishing SPVs abroad, SPVs’ obtaining the controlling interest in domestic enterprises and the SPV’s listing and issuing shares abroad. Furthermore, high-level authorities are in charge of the vetting for related regulatory matters, as the regulatory power is mostly concentrated in competent authorities under the PRC State Council. For example, the MOFCOM is in charge of vetting for the establishment of SPVs abroad, and an SPV’s mergers with and acquisitions of domestic companies via its status of related party or equity acquisition, the CSRC is in charge of vetting for SPVs’ listing and issuing shares abroad, and the SAFE and its provincial subsidiaries are in charge of foreign exchange registration. Obviously, such an allocation of regulatory power will facilitate the communication and coordination among the competent authorities, which are important for ensuring an effective regulation. However, some deficiencies exist in this regulatory framework and the related regulatory system and practice.
First, it is not completely reasonable to separately establish different regulatory regimes for the offering and listing of securities by grand red-chip and small red-chip companies. Under the dual-track regulatory framework, grand red-chip listing refers to the overseas listing of overseas Chinese-invested companies, and small red-chip listing at first refers to the overseas issuance of shares by foreign companies involving domestic equity, and after the revocation of no-action letter system, refers to the overseas issuance of shares by SPVs established by domestic enterprises abroad and not belonging to an overseas Chinese-invested company. However, the Grand Red-chip Circular and Small Red-chip Circular did not give any explanation of the connotation and extension of the grand red-chip and small red-chip concepts. In practice, almost all approvals made by the former SCSC or the CSRC in accordance with the Grand Red-chip Circular were in regard with the indirect overseas listing of SOEs. In light of this and the historical context of the Grand Red-chip Circular, the concept of overseas Chinese-invested company should refer to an overseas company in which a SOE in the PRC Mainland owns the holding interest, while the concept of small red-chip company should refer to an overseas SPV in which a domestic resident natural person or a non-SOE has the controlling interest. However, the scopes of grand red-chips and small red-chips have always been controversial since the Small Red-chip Circular was issued.Moreover, the boundary between these two concepts is indeed unclear in practice as there has been the precedent that the CSRC took the Grand Red-chip Circular as the legal basis for approving a domestic private company’s application for indirect overseas listing.In my opinion, from the view of either the form or the essence, there is no significant difference between the operation modes of and primary legal issues involved in the indirect overseas listing of a SOE and a non-SOE, so it is completely unnecessary to establish different regulatory regimes to oversee these two types of listing activities.
Secondly, there are blind spots in the coverage of indirect overseas listing regulatory framework. The stipulation that domestic enterprises must obtain approval from the CSRC before listing abroad established in Article 238 of the PRC Securities Law (2005 Revision) is literally the highest legal basis for regulations of both direct overseas listing and indirect overseas listing, and therefore, its coverage should extend to all scenarios of domestic enterprises’ indirect overseas listing. However, the Grand Red-chip Circular and the Provisions on Mergers and Acquisitions (2006), as laws subordinate to the PRC Securities Law (2005 Revision), did not set regulatory requirements for all scenarios of indirect overseas listing. For example, an overseas company whose controlling shareholder is a foreign natural or legal person seeking to be listed outside the PRC Mainland with its interest in the assets of a domestic enterprise neither belongs to the category of overseas Chinese-invested companies regulated by the Grand Red-chip Circular nor to the category of overseas SPVs regulated by the Provisions on Mergers and Acquisition (2006). In the case that a foreign holding company seeks to establish a foreign-invested company in the PRC Mainland by means of direct investment or by means of acquiring a domestic enterprise, they also only need to go through the common vetting and registration procedures in accordance with applicable foreign direct investment regulations and foreign exchange regulations. These listing modes mentioned above are different from the grand red-chip and small red-chip listing, neither touching upon cross-boarder transfer of interest in state-owned assets nor bringing the risk of loss of interest in domestic assets, but they are identical with indirect overseas listing of domestic enterprises at least in the forms and corporate structures. Moreover, if the related overseas listed company engages its business primarily in the PRC Mainland or earns revenue mainly from the PRC Mainland, it is oftentimes considered a China-based company just like the grand red-chip and small red-chip companies. As a result, the indirect overseas listing regulatory framework should include regulatory arrangements with respect to the above-mentioned overseas listing scenarios. Furthermore, the participants related to the indirect overseas listing, besides domestic enterprises, include market intermediaries such as domestic and foreign auditors, lawyers and investment banks. However, there are not any regulation for such market intermediaries and their cross-border business. The lack of regulatory constraints will inevitably lead to market failure, which is one of the major causes of the financial fraud committed by China-based companies listed on the U.S. stock exchanges.
Third, some core regulatory requirements for indirect overseas listing are not reasonable enough or clear enough, prone to breeding circumvention of related laws. Fairly speaking, the regulatory system and allocation of regulatory powers with regard to the establishment of SPVs abroad, SPVs’ acquisition of controlling interest in domestic companies and the overseas listing of SPVs are basically reasonable, but some core regulatory requirements cannot be fully justified. For example, the Grand Red-chip Circular takes the history of assets formation and the period of actual possession of such assets as the standards for setting the regulatory requirements on overseas listing of overseas Chinese-invested companies. In fact, the assets intended for listing, in essence, always belong to the category of domestic assets and should be equally regulated irrespective of whether they have been formed through foreign investment or whether the period of actual possession of such assets by the overseas Chinese-invested company has reached three years. Moreover, with regard to the step of taking controlling interests in the Domestic Company by the overseas SPV, the scope of the Provisions on Mergers and Acquisition (2006) is relatively narrow, in that it only covers the merger with or acquisition of a Domestic Company, and the change of the Domestic Company into a foreign-invested enterprise, those equity mergers and acquisitions of domestic non-foreign-invested enterprises by foreign investors and of domestic non-foreign-invested enterprises or foreign-invested enterprises by foreign investors via domestic foreign-invested enterprises are not subject to the Provisions on Mergers and Acquisition (2006).According to the provisions of the Provisions on Mergers and Acquisition (2006) and the Handbook of Guidance for the Market Access Administration of Foreign Investment (2008)(hereinafter the Foreign Investment Handbook), the latter two types of equity merger and acquisition shall be subject to the relevant rules on the alteration in investors' equity of foreign-invested enterprises that were put forward before the promulgation of the Provisions on Mergers and Acquisition (2006), and the competent authorities for vetting and approval shall be the local department in charge of business.It is just the Provisions on Mergers and Acquisition (2006) that provided the breach for quite many domestic private companies of those that completed indirect overseas listing after these provisions were promulgated to evade the vetting procedure required by the MOFCOM when building red-chip structures. This grey channel formed as an outcome of the game between market and government continuously challenge the bottom line of regulation, which drastically deteriorates the seriousness of regulations and rules. With regard to this point, one practitioner satirized somewhat more radically that “while the risk factors in the prospectuses for these grandfathered IPOs are downright frightening, the clean legal opinions given by PRC law firms for this model coupled with successful IPOs have cemented this as acceptable practice.”
Fourth, the regulations for indirect overseas listing do not harmonize with those for direct overseas listing, which leaves broad space for regulatory arbitrage. As compared to indirect overseas listing, the entities seeking direct overseas listing are joint-stock limited companies incorporated in the PRC Mainland, for which the overseas offering and listing of securities are the only steps being regulated. The current regulatory regimes of direct overseas listing include the listing conditions, rules for corporate governance and compliant operation, rules for foreign exchange administration and some ongoing regulatory rules. For example, as to the financial conditions for overseas issuance and listing of shares, in the regulations for direct overseas listing, there are some quantitative requirements that domestic enterprises shall meet, namely (i) the net assets are not less than RMB 400 million; (ii) the profit after tax within the past fiscal year is not less than RMB 60 million; and (iii) the financing amount calculated in terms of reasonable and expected P/E ratio is not less than USD 50 million. While under the regulations for indirect overseas listing, there are no similar requirements.For another example, as to foreign capital utilization policies, the regulations of direct overseas listing require that the use of the funds raised via listing and issuing shares abroad should be in line with China’s industry policies and policies on the use of foreign capital, while under the regulations of indirect overseas listing, despite the presence of similar requirements on foreign-invested companies in the PRC Mainland controlled by overseas listed entities, quite some domestic enterprises have circumvented the above restrictions through the means of the VIE model.One more example relates to CSRC’s administrative license items. Under the regulations for directly overseas listing, besides H-share IPO, the subsequently H-share additional offering, the issuance of H-share convertible corporate bonds, and H-share companies’ transfer of listing from the GEB to the main board of overseas stock exchanges, shall be approved by the CSRC. Under the regulations for indirect overseas listing, though overseas SPV’s IPO and the cross-border transfer of domestic assets or equity interests to overseas SPV shall be approved by the CSRC, almost all matters of overseas SPVs’ capital alteration after their IPO fall out the scope of CSRC’s vetting procedure. It is obvious that in the above aspects, the regulations of indirect overseas listing are relatively easy, the domestic compliance costs assumed by Chinese companies are relatively low, and the efficiency of overseas financing is relatively high.
Finally, the transparency of regulatory requirements and the enforcement require to be improved. On the one hand, a large portion of the regulatory requirements are established by low-level authorities, which are oftentimes embodied in the normative documents enacted by competent authorities under the PRC State Council, such as the CSRC, the MOFCOM or the SAFE, or even by the internal departments of the MOFCOM or the SAFE, and are thus at a lower level than the laws and administrative regulations. Among these normative documents, some regulations are contrary to the principles and spirit of the higher-level laws. For example, it is required by the Provisions on Mergers and Acquisition (2006) that a cross-border merger and acquisition between related parties shall, with no exception, be approved by the MOFCOM, but the Foreign Investment Handbook stipulates that an application of cross-border merger and acquisition that may be accepted shall meet one of the following two additional requirements: (i) the foreign company is a listed company; or (ii) the establishment of the foreign company has been approved, and the foreign company is actually in operation and makes round-tripping investment with profit.Furthermore, for some regulatory documents, a number of substantial regulatory requirements are implied in the procedural stipulations. For example, the CSRC requires in the list of documents for SPV's overseas application that the domestic enterprises shall have engaged in continuing operation for longer than two or three years. For another example, the Implementing Rules on Foreign Exchange Administration (2007) requires that an overseas SPV or a related domestic enterprise shall have engaged in continuing operation for at least three years before applying to go through the related foreign exchange registration. On the other hand, the regulatory information is not sufficiently open to the public, which may hinder the provision of clear compliance guidance to the market. For example, neither the Grand Red-chip Circular nor the Provisions on Mergers and Acquisition (2006) stipulates the conditions of domestic approval for indirect overseas listing; except for the stipulation that the vetting procedure for indirect overseas listing should be completed within twenty working days, there is no other specific rule on the CSRC’s approval procedure. For another example, according to incomplete statistics, the CSRC has published only fewer than thirty approvals accumulative for grand red-chip listing (incl. overseas asset injection into a red-chip listed company), far below the actual number of grand red-chip companies; as to the record keeping for grand red-chip companies in accordance with the Grand Red-chip Circular, the CSRC has never made any announcement to the public.
C. Some Policy Proposals
As stated above, the indirect overseas listing regulatory framework grew out of the special historical background of the early state of China’s economic reform and opening up, and the dual-track regulatory framework has gradually formed along with the country’s economic development and changes in ownership structure. In view of the material changes in the domestic and international capital markets over recent years, the above-mentioned regulatory framework should conform to the new situation and carry out proper revisions to remedy the problems exposed in regulatory practices.
First, the purpose of indirect overseas listing regulation should be accurately positioned, which serves as the prerequisite for optimizing the regulatory framework and enhancing the regulatory regimes. On the one hand, in order to implement the policies of stabilizing and expanding the use of foreign capital, indirect overseas listing regulatory framework should develop towards higher level of publicity and transparency, aiming at clear application scope, reasonable regulatory regimes, clear regulatory standards and appropriate adoption of market principles. Given the fact that domestic stock exchanges currently have no overall competitive advantages, however, China will inevitably concern about the loss of listing resources and the overseas loss of interest in domestic assets. Obviously, the competent authorities under the PRC State Council, such as the MOFCOM, the CSRC and the SAFE, can by no means solve the above conflicts, without the political wisdom contributed by decision makers at higher level. On the other hand, as to the domestic enterprises indirectly listed abroad, the listed entities have locations in different countries or regions for their incorporation, listing, and business operation. In such a case, China is neither the home country of the listed entity nor the country where it is listed, and China’s company law and securities law may not apply to the practice of overseas listing conducted by an overseas company. Therefore, indirect overseas listing regulation can take the initiative of neither protecting the interest of overseas investors, nor standardizing the organization and behaviors of overseas listed companies. Nevertheless, the cross-border nature of indirect overseas listing determines that the process of building a red-chip structure will inevitably involve international transfer of interest in domestic assets which constitutes the basis of the red-chip companies’ continuing operation. Determined by this, indirect overseas listing regulation should take oversight of domestic companies’ operation and protection of the reputation and the overall image of overseas listed Chinese companies as its ultimate purposes.
Second, there should be an integrated planning for the regulatory framework, which is the basis for reasonable allocation of regulatory powers and coordination of the regulatory regimes. As there is no need to maintain different regulatory treatment between the grand red-chip and small red-chip listing, the regulatory regimes with regard to them should be consolidated. Moreover, the difference between direct and indirect overseas listing is better reflected on the legal forms, while they are the same in terms of economic essence. This is why the H-share companies and the red-chip companies are both known to the foreign investors as China-based companies. As a result, it is necessary to further consolidate the regulatory frameworks regarding direct and indirect overseas listing by enacting an administrative regulation at the PRC State Council level based on the Special Provisions on Direct Overseas Listing(1994), the Grand Red-chip Circular and the Provisions on Mergers and Acquisition (2006) to establish a uniform regulatory system governing both of these two modes of overseas listing; then based on the above administrative regulation, the CSRC should independently or together with other competent authorities under the PRC State Council issue regulatory documents including administrative rules, so as to implement the specific regulatory standards. The significance of the above measures is that they are conducive to the downright implementation of Article 238 of the PRC Securities Law (2005 Revision), which requires direct and indirect overseas listing both need to be approved by the CSRC in accordance with the stipulations of the PRC State Council. By this means, the PRC State Council stipulations will for the first time engage in the area of indirect overseas listing, and the direct overseas listing system can also be improved. More importantly, integrating and designing regulatory regimes under the above framework can help fully reflect and implement the policy guidance that encourages direct overseas listing and restricts indirect overseas listing.Moreover, establishing a uniform regulatory framework is helpful for improving legislation efficiency, simplifying the regulatory system, eliminating the space for regulatory arbitrage, and facilitating the understanding and use of regulations by the market.
Third, the regulatory power should be reasonably allocated to harmonize and improve the regulatory regimes. In the first place, in order to implement the policy guidance mentioned above, avoid the "mismatch" between the overseas listed companies’ business, assets and operation activities and the regulation conducted by China and the target market, and alleviate the pressure from small red-chip listing on China's domestic regulation, direct overseas listing regulatory regimes should be revised in time, including but not limited to easing the listing conditions, removing restrictions on equity incentive proposals, clearing the channels for overseas equity investment to exit, and simplifying administrative approval and vetting procedures. These measures will definitely be conducive to creating an attractive regulatory environment for direct overseas listing. In addition, the conditions for indirect overseas listing, especially small red-chip listing, to be applicable must be made clear. According to the above policy guidance, the domestic enterprises planning to be listed in the form of grand red-chips or small red-chips, as well as the domestic enterprises controlled by overseas resident natural or legal persons but primarily engaging business in the PRC Mainland should mainly choose the means of direct overseas listing, while indirect overseas listing is mainly applicable to “true” overseas companies involving domestic equity and only conducting a small amount of business in the PRC Mainland. As such, it is worth a try to set a few regulatory standards based on the ratios of a company’s domestic revenue to global revenue, its domestic assets aggregate to global assets, as well as domestic operating profits to global operating profits, and require only the domestic enterprises with the above ratios lower than these standards be allowed to apply for indirect overseas listing. What is more, allocation of indirect overseas listing regulatory power should be optimized. For example, it is doable to properly lower the degree of the CSRC regulatory enforcement with regard to injection of domestic assets to an overseas Chinese-invested company or the matters related to the listing of an overseas Chinese holding company (e.g. changing administrative approval in advance to record keeping afterwards) on the basis of retaining the current regulatory links, and concentrate the regulation of mergers and acquisitions by foreign capital involved in indirect overseas listing to the MOFCOM, to eliminate the overlap of regulatory power resulting from the Grand Red-chip Circular and the Provisions on Mergers and Acquisition (2006) between the CSRC and the MOFCOM. More importantly, it is essential to strengthen the regulation of market intermediaries, improve the mechanism of cross-border listing regulatory cooperation, establish reasonable and feasible arrangement of cross-border regulation, and clarify the legal responsibilities of the Chinese and foreign market intermediaries, so that the intermediaries are put under both the market constraints and the external regulation.
Lastly, the transparency of regulatory standards and regulatory practices should be enhanced. On the one hand, the coordination between regulatory normative documents should be strengthened, so as to establish clear regulatory lines including overseas investment administration, round-tripping investment, overseas listing and foreign exchange administration in accordance with the regulatory power allocation post-adjustment, and define the specific regulatory standards based on these four regulatory lines. On the other hand, the level of regulations should be raised so that main regulatory requirements are established by the administrative regulation enacted by the PRC State Council, and the practice of establishing universally binding regulatory standards in the documents formulated by internal departments of related competent authorities under the PRC State Council should be avoided. By raising the level of regulations, the stability of the regulatory system can also improve, so as to reduce hasty changes in the regulatory standards. Furthermore, the verification standards and time limit for each administrative approval should be clarified, so as to establish fair administrative approval procedures, and the result of administrative approvals should be made public in a timely manner.
It demands the cooperation between China and the U.S. to enhance the regulatiory mechanism for the cross-border listing activities. As to the China side, it has been nearly twenty years since its indirect overseas listing regulatory framework was created from scratch, and each regulatory regime has its special implications endowed by the particular historical period that gave birth to it or validated its continuation. The Grand Red-chip Circular, the Small Red-chip Circular and the Provisions on Mergers and Acquisition (2006) all proved China’s efforts and exploration in indirect overseas listing regulation. Looking forward, the evolution of this regulatory framework will continue, but in a direction unclear yet, that is, either consolidating the regulatory frameworks for direct and indirect overseas listing or just amending and improving the direct overseas listing regulatory framework, while maintaining the status quo in next few years also serves as an alternative. Nevertheless, the crisis of the international capital market’s deteriorating trust on China-based companies is only an external pressure, whereas the intrinsic motivation to enhance overseas listing regulatory framework lies in China’s desire to promote its capital market’s competitiveness in a global context. Moreover, China’s capital market is facing an international environment more complex than ever before. This determines that China will be more prudent when considering improving its indirect overseas listing regulatory framework under influences from multiple layers of policies. China has realized that strengthened regulations of the domestic enterprises’ indirect overseas listing can neither share or reduce the duty of the U.S. authorities nor replace the due diligence responsibilities of the intermediaries servicing the cross-border issuers. Therefore, there should be a clear target and idea for indirect overseas listing regulation for the purpose of refining the regulatory framework and creating well-designed regulatory regimes, while an effective mechanism for cross-border inspection and accountability should also be established. China will accumulate more experience in and master more techniques of cross-border listing regulation, which is also extremely helpful for the buildup of Shanghai international board.
Table 1: Number of Overseas IPO by Chinese Companies and Total Amount of Raised Capital
Direct Overseas Listing
Indirect Overseas Listing
Number of Overseas IPO
Total Amount of Raised Capital ($mm)
Number of Overseas IPO
Total Amount of Raised Capital ($mm)
Number of Overseas IPO
Total Amount of Raised Capital ($mm)
1996 and previous years
Source：CVSource, ZDB Database, Dealogic, CSRC's website
Associate Professor of Law at Nankai University (China). I acknowledge the helpful technical assistance provided by China International Capital Corporation Limited, Goldman Sachs GaoHua Securities Company Limited, Zero2IPO Research Center, ChinaVenture Investment Consulting Group, and LexisNexis China. I also thank the editors and staff of the SRLJ for their dedication and assistance improving this article. This article forms part of a research project commissioned by the Ministry of Justice of the People’s Republic of China (PRC) and the China Postdoctoral Research Foundation.
Some PRC laws, regulations and rules are only playing a less important supporting role for the analysis of this article, so their Chinese-language weblinks are not included in the citation.Data on the number of overseas IPO by Chinese companies and the total amount of raised capital were obtained and integrated from different sources, including the databases such as CVSource, ZDB Database and Dealogic, and the website of the CSRC at http://www.csrc.gov.cn/pub/newsite/sjtj/ (last visited Dec. 15, 2011).
 Dennis K. Berman, Congress and SEC Hit Stocks Made in China, WALL ST. J., Dec. 20, 2010.
 PCAOB, ACTIVITY SUMMARY AND AUDIT IMPLICATIONS FOR REVERSE MERGERS INVOLVING COMPANIES FROM THE CHINA REGION: JANUARY 1, 2007 THROUGH MARCH 31, 2010 (PCAOB Research Note # 2011-P1), available at http://pcaobus.org/Research/Documents/Chinese_Reverse_Merger_Research_Note.pdf.
 Investor Bulletin, SEC, REVERSE MERGERS (Jun. 9, 2011), available at http://www.sec.gov/investor/alerts/reversemergers.pdf.
 MOODY'S INVESTORS SERVICE, RED FLAGS FOR EMERGING-MARKET COMPANIES:
A FOCUS ON CHINA (Jul. 11, 2011), available at http://members.zkiz.com/storage/1610/6c2dPBC_134306.pdf.
 CORNERSTONE RESEARCH, SECURITIES CLASS ACTION FILINGS: 2011 MID-YEAR ASSESSMENT, available at http://securities.stanford.edu/clearinghouse_research/2011_YIR/Cornerstone_
 PRESS RELEASE, SEC, U.S. AND CHINESE REGULATORS MEET IN BEIJING ON AUDIT OVERSIGHT COOPERATION (Aug. 8, 2011), available at http://www.sec.gov/news/press/2011/2011-164.htm.
 On the international capital market, the term “red chips” generally refers to the stocks that are traded on overseas stock exchanges and are issued by companies established outside of the PRC Mainland but controlled by legal or natural persons in the PRC Mainland, and those issuing red chips are called red-chip companies. However, there are no strict and uniform definitions to separate these two terms, red chips and-red chip companies. For example, in HKEX’s opinion, a red chip company is a company that has at least 30% of its shares in aggregate held directly by Mainland China entities and/or indirectly through companies controlled by them, with the Mainland China entities being the single largest shareholders in aggregate terms. Alternatively, a company is a red chip company if less than 30% but more than 20% of its shares are held directly and/or indirectly by Mainland China entities and there is a strong influential presence of Mainland China-linked individuals on the company's board of directors. Mainland China entities include SOEs and entities controlled by Mainland China provincial and municipal authorities. For HKEX’s interpretation of the difference between H-share companies and red chips, see HKEX, Overview of the HKEX Markets (Aug. 31, 2009), available at http://www.hkex.com.hk/chi/global/faq/hkex%20markets_c.htm. Hang Seng Indexes Company Limited (Hang Seng Indexes) considers that a red chip refers to a company with a minimum of 30% of shareholdings held by the Mainland entities (including state-owned organizations, provincial or municipal authorities of the Mainland) and at least 50% of their sales revenue (or profits or assets if more relevant) derived from the Mainland. For the selection criterion of the Hang Seng China-Affiliated Corporations Index, see HANG SENG INDEXES, HANG SENG CHINA-AFFILIATED CORPORATIONS INDEX: OVERVIEW, available at http://www.hsi.com.hk/HSI-Net/HSI-Net. Moreover, there are different versions of definition for grand red-chips and small red-chips. For example, Morgan Stanley Capital International Inc. (MSCI) respectively denote grand red-chips and small red-chips as red chips and P chips when compiling its MSCI China Indices, hence giving rise to MSCI China Red Chip Index and MSCI China P Chip Index. For an overview of MSCI China Indices, see MSCI, MSCI CHINA INDICES, available at http://www.msci.com/products/indices/country_and_regional/domestic_equity_indices/
 Reverse merger is broadly used to describe any acquisition of a private operating company by a public shell company that typically results in the owners and management of the private operating company having actual or effective voting and operating control of the combined company. Through a reverse merger transaction, although the public shell company is the surviving entity, the private operating company’s shareholders control the surviving entity or hold shares that are publicly traded. Through a reverse merger transaction, the private company, in effect, becomes a SEC reporting company with registered securities without filing a registration statement under the U.S. Securities Act of 1933 or the U.S. Securities Exchange Act of 1934. As such, listing through reverse merger is usually referred to as back-door listing. See supra note 2, at 1.
 In Oct. 1992, the 14th National Congress of the Communist Party of China (CPC) set the goal of establishing the system of socialist market economy for economic reform. See CPC, RESOLUTION OF THE 14TH NATIONAL CONGRESS OF THE CHINESE COMMUNIST PARTY ON THE REPORT OF 13TH CENTRAL COMMITTEE OF THE COMMUNIST PARTY OF CHINA (Oct. 18, 1992), available at http://www.gov.cn/test/2008-07/04/content_1036104.htm. In Nov. 1993, the 3rd Plenary Session of 14th Central Committee of the CPC adopted a resolution which specified the above-mentioned objectives and general principles of economic reform. The resolution states that the policy of joint development of multiple economic elements with the economy of public ownership as the main body should be insisted, the operational mechanism of state-owned enterprises should be further transformed, and a modern enterprise system caters for the requirements of market economy, characterized by clearly established ownership, well defined power and responsibility, separation of enterprise from administration, and scientific management, should be established. See CPC, DECISION OF THE CPC CENTRAL COMMITTEE ON CERTAIN ISSUES IN ESTABLISHING A SOCIALIST MARKET ECONOMY SYSTEM (Nov. 14, 1993), available at http://www.people.com.cn/GB/shizheng/1024/2145119.html.
 A-share market and B-share market are separate on both the SHSE and the SZSE. B shares are subscribed and traded in foreign currencies, with par value denominated in Renminbi (RMB). A shares, officially called RMB ordinary shares, are subscribed and traded in RMB, with par value denominated in RMB.
 Brilliance Automotive delisted its American Depositary Shares (ADSs) from the NYSE, effectively on Jul. 27, 2007 due to the decline in trading volume of it's ADSs and the increase in administrative costs to comply with U.S. reporting and registration obligations. Brilliance Automotive is the first China-based company that gave up the listing status on the NYSE. See Peter M. Friedman, China’s Information Control Practices and the Implications for the United States (Jul. 30, 2010) (Testimony before the U.S. China Economic and Security Review Commission (USCC)), available at http://www.uscc.gov/hearings/2010hearings/transcripts/10_06_30_trans/friedman_
 See the Circular of the General Office of the PRC State Council Concerning the Establishment of the Securities Commission of the PRC State Council (GUOBANFA  No. 54) (promulgated by the General Office of the PRC State Council, Oct. 12, 1992, effective as the date of promulgation), available at http://law.lawtime.cn/d611227616321.html. The former SCSC was the competent authority responsible for the unified macro administration of securities markets. Its director was the premier of the PRC State Council and its commissioners comprised the persons-in-charge of 13 relevant departments such as the People’s Bank of China. The CSRC was the executive body under the former SCSC. In Apr. 1998, the former SCSC and the CSRC merged and the latter, being the entity directly under the PRC State Council, is responsible for the centralized and unified regulation of China's securities and futures markets. For an overview of CSRC’s statutory duties, see the Circular of the General Office of the PRC State Council Concerning the Responsibilities, Internal Departments and Staffing of the China Securities Regulatory Commission (GUOFA  No. 5) (promulgated by the General Office of the PRC State Council, Sep. 30, 1992), available at http://www.sse.com.cn/sseportal/dmxh/zhx_new_20030803b.pdf.
 Promulgated by the PRC State Council on Apr. 22, 1993 and effective as of the date of promulgation, available at http://www.law-lib.com/law/law_view.asp?id=9488.
 Promulgated by the PRC State Council on Dec. 17, 1992, available at http://www.law-lib.com/law/law_view.asp?id=55541.
 Promulgated by the former SCSC on Apr. 9, 1993, available at http://www.law-lib.com/law/law_view.asp?id=56006.
 Published by the CSRC on Feb. 4, 1994, available at http://law.lawtime.cn/d617064622158.html.
 SCSC Circular, para. 2.
 Share Issuance and Trading Regulation, Art. 6; SCSC Circular, para. 3.
 CSRC's Letter, para. 6.
 Id., paras. 7-8.
 See Table 1 annexed to this article.
 Promulgated by the PRC State Council on Jun. 20, 1997, and effective as of the date of promulgation, available at http://www.law-lib.com/law/law_view.asp?id=65014.
 Grand Red-chip Circular, paras. 2-3.
 Id., paras. 1-2.
 Id., para. 4.
 Promulgated by the PRC State Council on Feb. 2, 1998, available at http://www.law-lib.com/law/law_view.asp?id=66454.
 Supra note 21.
 Adopted at the 5th Meeting of the Standing Committee of the 8th National People’s Congress on Dec. 29, 1993, and effective of Jul. 1, 1994, available at http://www.law-lib.com/law/law_view.asp?id=96136. The PRC Company Law (1993) was revised subsequently in 2004 and 2005. The PRC Company Law (2005 Revision) is currently effective, available at http://www.law-lib.com/law/law_view.asp?id=102906.
 Promulgated by the PRC State Council on Aug. 4, 1994 and effective as of the date of promulgation, available at http://www.law-lib.com/law/law_view.asp?id=10621.
 These regulatory documents include: (i) Mandatory Provisions for Articles of Association of Companies to be Listed Overseas (ZHENGWEIFA  No. 21) (jointly promulgated by the former SCSC and the abolished PRC State Commission for Restructuring the Economic System on Aug. 27, 1994, and effective as of the date of promulgation); (ii) Circular on Issues Relating to Domestic Enterprises’ Applications for Overseas Listing (ZHENGJIANFAXINGZI  No. 83, hereinafter the Circular on Direct Overseas Listing) (promulgated by the CSRC on Jul. 14, 1999); (iii) Guidelines on the Vetting and Regulation of Applications for Listing on the Hong Kong GEM by Domestic Enterprises (ZHENGJIANFAXINGZI  No. 126, hereinafter the Guidelines for Listing on the Hong Kong GEM) (approved by the PRC State Council on Sep. 6, 1999, promulgated by the CSRC on Sep. 21, 1999); (iv) Notice on Issues Relating to the Foreign Exchange Regulation for Enterprises Listed Overseas (ZHENGJIANFAZI  No. 8) (jointly issued by the CSRC and the PRC State Administration of Foreign Exchange (SAFE) on Jan. 13, 1994); (v) Several Opinions on the Further and Proper Handling of Information Disclosure Work by Companies Listed Overseas (ZHENGJIANFA  No. 18) (issued by the CSRC on Mar. 26, 1999); (vi) Opinions on Further Promoting the Regulated Operation and Intensive Reform of Companies Listed Overseas (GUOJINGMAOQIGAI  No. 230) (jointly issued by the abolished PRC State Economic and Trade Commission and the CSRC on Mar. 29, 1999); and (vii) Guidelines for Secretaries of the Boards of Directors of Companies Listed Overseas (ZHENGJIANFAXINGZI  No. 39) (issued by the CSRC on Apr. 8, 1999).
 At that time, the regulatory documents concerning overseas direct investment included but not limited to the Tentative Rules for the Approval and Regulation Concerning the Establishment of Non-trade Enterprise Abroad (promulgated by the former MOFERT on Mar. 23, 1993) (repealed). The regulatory documents concerning foreign direct investment included but not limited to the following: (i) PRC Law on Chinese-Foreign Equity Joint Ventures (1990 revision) (adopted by the 2nd Session of the 5th National People’s Congress on Jul. 1, 1979, promulgated on Jul. 9, 1979 and revised on Apr. 4, 1990 and on Mar. 15, 2001 respectively); (ii) PRC Law on Chinese-foreign Contractual Joint Ventures (1988) (adopted at the 1st Session of the 7th National People’s Congress, promulgated on Apr. 13, 1988, and effective as of the date of promulgation); (iii) PRC Law on Foreign-capital Enterprises (1986) (adopted at the 4th Session of the 6th National People’s Congress on Apr. 12, 1986, revised on Oct. 31, 2000); and (iv) the implementing regulations enacted by the PRC State Council under the above-mentioned laws. The regulatory documents concerning the foreign exchange involved in direct investment abroad and in foreign indirect investment included but not limited to the following: (i) Measures for the Administration of the Foreign Exchange Involved in Investment Abroad (1989) (approved by the PRC State Council on Feb. 5, 1989, promulgated by the SAFE on Mar. 6, 1989) (repealed); (ii) Implementing Rules for “Measures for the Administration of the Foreign Exchange Involved in Investment Abroad (1989)”(1990) (promulgated by the SAFE on Jun. 26, 1990) (repealed); and (iii) Tentative Rules for the Foreign Exchange Registration of Foreign-funded Enterprises (1996) (promulgated by the SAFE on Jun. 28, 1996).
 Before 1993, the competent authority under the PRC State Council was the former Ministry of Foreign Economic Relations and Trade (MOFERT). It was decided in Mar. 1993 at the 1st Session of the 8th National People’s Congress that the former MOFTEC be renamed as the former Ministry of Foreign Trade and Economic Cooperation (MOFTEC). In Mar. 2003, the 1st Session of the 10th National People’s Congress decided to establish the Ministry of Commerce (MOFCOM), replacing the MOFTEC. For an overview of MOFCOM’s history, see MOFCOM, THE HISTORY, available at http://english.mofcom.gov.cn/history.shtml.
 Adopted at the 6th Meeting of the Standing Committee of the 9th National People’s Congress on Dec. 29, 1998, and effective of Jul. 1, 1999, available at http://www.law-lib.com/law/law_view.asp?id=86449. The PRC Securities Law (1998) was revised subsequently in 2004 and 2005. The PRC Securities Law (2005 Revision) is currently effective, available at http://www.law-lib.com/law/law_view.asp?id=102905.
 Current Art. 238 of the PRC Securities Law (2005 Revision).
 In Dec. 2009, Qiao Xing Universal Telephone, Inc. was renamed as Qiao Xing Universal Resources, Inc.
 On Jul. 7, 2009, Yuxing InfoTec was renamed as Yuxing InfoTech Investment Holdings Limited.
 For a detailed introduction of Yuxing InfoTec's pre-IPO reorganization, see Yuxing InfoTec's 1999 IPO prospectus, pp. 37-38, available at http://www.hkexnews.hk/newlistings/prospectuses/e_8005pro-20000125chap03.pdf.
 See CERTIFICATE OF APPROVAL, CSRC, CERTIFICATE OF APPROVAL ISSUED BY THE CHINA SECURITIES REGULATORY COMMISSION ON THE LISTING OF SHARES ON THE GROWTH ENTERPRISE MARKET OF THE HONG KONG STOCK EXCHANGE BY GOLDEN YUXING ELECTRONICS AND TECHNOLOGY COMPANY LIMITED AFTER ITS REORGANIZATION (ZHENGJIANHAN  No. 12), CSRC BULLETIN, Iss. 1, 2000, p. 25.
 See PRESS RELEASE, CSRC, THE LEGAL DEPARTMENT OF THE CHINA SECURITIES REGULATORY COMMISSION PUBLICLY CRITICIZES BEIJING JINGTIAN LAWYERS' OFFICE AND RELATED CERTIFIED LAWYER, CSRC BULLETIN, Iss. 2, 2000, p. 22.
 Promulgated on Jun. 9, 2000, and effective as the date of promulgation, available at http://www.law-lib.com/law/law_view.asp?id=72094.
 Small Red-chip Circular, Art. 1.
 Id., Arts. 2-3.
 Promulgated on Aug. 27, 2003 and effective as of Jul. 1, 2004, available at http://www.law-lib.com/law/law_view.asp?id=79264.
 Under China’s legislative system, an administrative license may be established by means of laws (adopted either by the PRC National People's Congress or the PRC Standing Committee of the National People's Congress) or administrative regulations (enacted by the PRC State Council). See the PRC Administrative License Law (2003), Chpt. II (The Establishment of an Administrative License). The Small Red-chip Circular instituted by the CSRC exists at a lower level than laws and administrative regulations, and thus is not legally qualified to establish an administrative license item.
 It is worth noting that the reply with regard to indirect overseas listing of Yuxing InfoTec was the only one issued in the name of the CSRC, in which it was stated that “the CSRC gives consent to Yuxing InfoTec Holdings Limited’s intent to apply to issue shares and be listed as Yuxing InfoTec incorporated in Bermuda on Hong Kong GEM after finishing its restructuring.” However, this reply was not sent to Yuxing InfoTec, Beijing Golden Yuxing Electronics and Technology Company Limited, or the related domestic law firm, but to the sponsor of Yuxing InfoTec’s overseas IPO. See CERTIFICATE OF APPROVAL, CSRC, CERTIFICATE OF APPROVAL ISSUED BY THE CHINA SECURITIES REGULATORY COMMISSION ON THE LISTING OF SHARES ON THE GROWTH ENTERPRISE MARKET OF THE HONG KONG STOCK EXCHANGE BY GOLDEN YUXING ELECTRONICS AND TECHNOLOGY COMPANY LIMITED AFTER ITS REORGANIZATION (ZHENGJIANHAN  No. 12), CSRC BULLETIN, Iss. 1, 2000, p. 25.
 See staff reporter, Euro-Asia Sponsor not Entirely to Blame, THE STANDARD, Oct. 16, 2002. Euro-Asia Holdings was incorporated in Bermuda and its beneficiary owner was Mr. Yangbin, a Chinese-Dutch businessman. Euro-Asia Holdings’ main business covered flower-growing and real estate development in the Mainland China. The CSRC issued the no-action letter concerning Euro-Asia Holdings’ indirect overseas listing on Jun. 12, 2001. Then, Euro-Asia Holdings finished its IPO and began to be listed on the HKEX from Jul. 19, 2000. Euro-Asia Holdings' sponsor and auditor for its share listing in Hong Kong were ICEA Capital Limited and former Arthur Andersen & Co. Euro-Asia Holdings was selected by Forbes magazine as one of the best 200 small companies in Oct. 2001. Since Jun. 2001, the stocks of Euro-Asia Holdings have been suspended repeatedly due to suspicion of providing false financial information in its IPO prospectus and failure to accurately disclose information about shareholders’ reduction of holdings in a timely manner. Hong Kong securities regulators also conducted inspection on the company and ICEA Capital Limited. On May 10, 2004, the Supreme Court of Hong Kong ordered the liquidation of Euro-Asia Holdings, and the company’s listing on HKEX was terminated on May 20, 2004. On Jan. 27, 2005, ICEAC paid HK$30 million to settle with the SFC for not exercising “due skill, care and diligence in the course of performing its duties as the sponsor for the listing of Euro Asia Agricultural (Holdings) Company Limited.” See PRESS RELEASE, SFC, ICEAC PAYS HK$30 MILLION TO SETTLE SFC DISCIPLINARY CASE (Jan. 27, 2005), available at http://www.sfc.hk/sfcPressRelease/EN/sfcOpenDocServlet?docno=05PR17. Previously, the local court of Shenyang, China provided a judgment on Jul. 14, 2003 that sentenced Mr. Yangbin eighteen years in prison and imposed a fine of RMB2.3 million for plural crimes including misstating of registered capital and unlawful occupation of farmland. See SHENYANG INTERMEDIATE COURT OF THE PRC, CRIMINAL JUDGMENT OF THE SHENYANG INTERMEDIATE COURT ( SHENXING'ERCHUZI No. 70), available at http://syzy.chinacourt.org/public/detail.php?id=964.The Higher Court of Liaoning Province of the PRC ruled on Sep. 7, 2003 that Mr. Yangbin’s appeal was dismissed and the original judgment was sustained. See anonymous reporter, The Final Ruling of Yangbin Case, PEOPLE'S COURT DAILY OF CHINA, Sep. 8, 2003.
 See CSRC, NOTICE ON CANCELING SOME ADMINISTRATIVE LICENSE ITEMS (PHRASE II) AND ADJUSTING THE REGULATORY MEASURES UNDER SOME ADMINISTRATIVE LICENSE ITEMS, Apr. 1, 2003, CSRC BULLETIN, Iss. 4, 2003, pp. 22-24.
 These no-action letters are available from the CSRC BULLETIN, Iss. 1, 2000, p. 25; Iss. 7, 2002, pp. 44-124; Iss. 8, 2002, pp. 25-67; Iss. 12, 2002, pp. 68-82. See also supra note 21.
 According to China’s foreign capital utilization policies, the telecommunication industry has always been closed to foreign investment. For example, Art. 6 of the Provisional Measure for Releasing Approval of Engaging in Telecommunication Operation (issued by the former Ministry of Posts and Telecommunications on Sep. 11, 1993, effective from Nov. 1, 1993, already invalidated) stipulates that "overseas institutions and individuals as well as the wholly foreign-owned companies, Sino-foreign joint ventures or cooperative companies within the borders of the PRC are not allowed to invest in, operate or participate in the operation of telecommunication business." Moreover, in each version of the Catalogue for the Guidance of Foreign Investment Industries published by the competent authority under the PRC State Council, “OPERATION AND MANAGEMENT OF TELECOMMUNICATION BUSINESS” was listed in the “CATALOGUE OF PROHIBITED FOREIGN INVESTMENT INDUSTRIES”. However, the competent authorities under the PRC State Council do not suspect the VIE model of evading China’s regulation of foreign capital utilization. For example, the former PRC Ministry of Information Industry (current the PRC Ministry of Industry and Information Technology) issued the Circular Regarding Further Strengthening the Review and Licensing of Internet Information Services and Internet Bulletin Board Services (XINBUDIAN  No. 166) on Mar. 27, 2001, stipulating that “foreign capital is prohibited from operating telecommunication businesses including internet content provider (ICP) business, and the websites involving foreign investment can apply for operation permit after stripping off the foreign capital; there are two applicable means for stripping off foreign capital: (i) the foreign-held equity interest in a website is entirely removed or transferred to a Chinese shareholder, and (ii) the assets, employees, domain name, brand, operation right and customer relationships related to ICP business are transferred to a pure Chinese-invested company that is separately established to independently operate the ICP business; the former company involving foreign investment is no longer allowed to operate the website, but can include the Chinese-invested company into its client base and cooperate with it in areas like technical services.” In this sense, it is possible that the Chinese government recognized the VIE model as valid for the purpose of appropriately and effectively controlling the opening of telecommunication business in some particular areas.
 See, e.g., the Provisions on the Approval and Regulation of Running Non-trade Enterprises Abroad (promulgated by the former MOFERT on Mar. 23, 1993, and effective as the date of promulgation) (repealed), Art. 2; Provisions on the Examination and Approval of Investment to Run Enterprises Abroad (promulgated by the MOFCOM on Oct. 1, 2004, and effective as the date of promulgation), Art. 3.
 These regulatory documents include: (i) Circular on Issues Relating to the Further Improvement of Foreign Exchange Regulation of Overseas Listing (HUIFA  No. 77) (jointly issued by the SAFE and the CSRC on Aug. 5, 2002); (ii) Circular of the Capital Account Management Department under the State Administration of Foreign Exchange on Strengthening the Administration of Foreign Exchange Related to Overseas Listing (HUIZIHAN  No. 29) (issued by the SAFE's Department of Capital Account Administration on Sep. 9, 2002); (iii) Circular on Strengthening the Administration of Foreign Exchange Related to Overseas Listing (HUIFA  No. 108) (issued by the SAFE on Sep. 9, 2003); and (iv) Circular on the Administration of Foreign Exchange Related to Overseas Listing (HUIFA  No. 6) (issued by the SAFE on Feb. 1, 2005).
 Promulgated on Mar. 7, 2003 and effective as of Apr. 12, 2003, available at http://www.law-lib.com/law/law_view.asp?id=42949.
 Provisions on Mergers and Acquisition (2003), Art. 12.
 Id., Art. 6.
 Id., Arts. 8 and 9.5.
 In 2004, a research report published by Chinese Academy of International Trade and Economic Cooperation (CAITEC) under the PRC Ministry of Commerce triggered wide repercussions. That report points out that the lifted position of off-shore financial centers in China’s cross-border capital flows has some positive implications, but also brings about considerable negative influences: (i) providing corrupt officials and unscrupulous businessmen with means of seizing state-owned assets and public wealth; (ii) pushing the size of capital flight to further swell up, hence causing significant pressures on arrangement of Renminbi exchange rate and implementation of monetary policies; (iii) inducing potential dispute over investment; (iv) making convenience for corporate fraud; and (v) transferring the financial risks. See CAITEC, ISSUES OF CROSS-BORDER CAPITAL FLOW BETWEEN CHINA AND OFF-SHORE FINANCIAL CENTERS, in CAITEC eds., BLUE PAPER ON CHINA'S FOREIGN TRADE AND ECONOMIC RELATIONS (2004), CHINA COMMERCE AND TRADE PRESS, 2004, pp. 385-416.
 Promulgated by the SAFE on Mar. 6, 1989 and effective as of the date of promulgation. It is stipulated that the companies, enterprises or other business organizations registered in the PRC Mainland should apply for examination by foreign exchange administration on foreign exchange investment risks and sources of funds denominated in foreign currency, and complete related procedures including but not limited to registration, before they are allowed to establish any type of enterprises abroad, or purchase equity or acquire holdings in a foreign company and carry out production or operation activities upon the resulting position. See the Foreign Exchange Control Provisions, Arts. 2-4. Before the No. 11 Foreign Exchange Administration Circular, there was no foreign exchange regulation regarding the overseas investment by natural person residents in China. Therefore, a Chinese citizen who wishes to invest abroad does not have to go through any procedure of foreign exchange registration or ratification.
 A “domestic resident legal person” shall refer to an enterprise or public institution or other economic organization legally established in the PRC Mainland; while a “domestic resident natural person” shall refer to a natural person who holds a PRC resident identity card, a passport or other lawful identity certificate, or a natural person who has no PRC identity but habitually resides inside the PRC Mainland due to reasons of economic interests. See the No. 75 Foreign Exchange Administration Circular, Section I.
 An “SPV” shall refer to an overseas enterprise directly established or indirectly controlled by a domestic resident legal person or domestic resident natural person for the purpose of engaging in equity financing (including convertible bond financing) abroad with the enterprise assets or interests it/he holds in the PRC Mainland. “Round-tripping investment” shall refer to the direct investment activities carried out in the PRC Mainland by a domestic resident via an SPV, including but not limited to the following ways: acquisition or exchange of the equity rights of the Chinese party to a domestic enterprise, establishment of a foreign-funded enterprise in the PRC Mainland and acquisition or agreement-based control of assets in the PRC Mainland via this enterprise, agreement-based acquisition of assets in the PRC Mainland and investment with the acquired assets to establish a foreign-funded enterprise, and increase capital to a domestic enterprise. “Control” shall refer to the behavior that a domestic resident obtains the rights to carry out business operation of, to gain proceeds from or to make decisions on a special purpose company or a domestic enterprise by means of acquisition, trusteeship, holding shares on behalf of others, voting rights, repurchase, convertible bonds, etc. See the No. 75 Foreign Exchange Administration Circular, Section I.
 These major capital alterations may include the situations such as capital increase or decrease, equity transfer or swap, merger or split of companies, long-term equity or credit investment, and guaranties to other parties. See the No. 75 Foreign Exchange Administration Circular, Section 7.
 This regulatory document is entitled Circular of the SAFE's Department of General Affaires on the Implementing Rules of the ‘Circular on Further Strengthening the Administration of Foreign Debts’ and the ‘Circular on Relevant Issues Concerning Foreign Exchange Administration for Domestic Residents to Engage in Financing and in Round-tripping Investment via Overseas Special Purpose Vehicles’ (HUIZONGFA  No. 124, hereinafter the Implementing Rules on Foreign Exchange Administration (2005)). The provisions related to the No. 75 Foreign Exchange Administration Circular in the Implementing Rules for Foreign Exchange Administration (2005) is effective as the date of promulgation.
 See Li Shoushuang et al., Red-chip Listing Game, CUPL PRESS, 2011, p. 46.
 After its coming into effect, the Provisions on Mergers and Acquisition (2006) was promulgated again on Jun. 22, 2009, with a revision made by the MOFCOM, where there was no material change in the provisions except for some modification in the stipulations on anti-monopoly review. Therefore, the catalogue numbers of the original document were used in this article when citing related provisions from the Provisions on Mergers and Acquisition (2006).
 Provisions on Mergers and Acquisition (2006), Art. 42.
 Id., Arts. 10, 21 and 27-38.
 Provisions on Mergers and Acquisition (2006), Arts. 45-48.
 For example, CPMC Holdings Limited (HK: 0906, hereinafter CPMC) accomplished its IPO and was listed on the HKEX in Nov., 2009. CPMC’s beneficial owner, COFCOA Corporation, is one of the central SOEs supervised by the PRC SASAC. According to the IPO prospectus of CPMC, its overseas listing obtained the approvals from Chinese competent authorities including the CSRC, and the legal basis of these approvals includes but is not limited to the Grand Red-Chip Circular and the Provisions on Mergers and Acquisition (2006). See CPMC’s 2009 IPO prospectus (English version), p.27, available at http://www.hkexnews.hk/listedco/listconews/sehk/2009/1102/LTN20091102004.pdf.
 The list was originally published on the column of “ADMINISTRATIVE PERMISSION” on CSRC's website. However, it was deleted before long and has not been re-published since then.
 Implementing Rules on Foreign Exchange Administration (2007), Annex I, Column “KEY POINTS FOR VETTING”, para. 2, and Column “MATTERS NEED ATTENTION”, paras. 1 and 2.
 Id., Annex IV, Column "MATTERS NEED ATTENTION", para. 2.
 It is worth to note that, on May 27, 2011, the SAFE issued the Circular of the State Administration of Foreign Exchange on the Implementing Rules of the “Circular on Relevant Issues Concerning Foreign Exchange Administration for Domestic Residents to Engage in Financing and in Round-tripping Investment via Overseas Special Purpose Vehicles” (HUIFA  No. 19, hereinafter the Implementing Rules on Foreign Exchange Administration (2011)) which came into force on Jul. 1, 2011. Compared to the Implementing Rules on Foreign Exchange Administration (2007), the Implementing Rules on Foreign Exchange Administration (2011) simplifies the procedures of foreign exchange registration related to domestic natural person residents and repealed the time limit of continuing operation for overseas SPVs and related domestic enterprises.
 See the Macro-control Circular, Section IV (stating that “the overseas issuance and listing of shares by selected enterprises must be arranged and approved by the State Council Securities Commission”).
 Promulgated by the CSRC on May 17, 2006 and effective as of May 18, 2006, available at http://www.gov.cn/flfg/2006-05/18/content_283660.htm.
 The HKEX is the main target market for Chinese enterprises' overseas listing. According to the main board listing qualification rules of the HKEX, an issuer must satisfy one of the following tests: (i) profit test: a trading record of not less than three financial years during which the profit attributable to shareholders must, in respect of the most recent year, be not less than HKD 20 million; in respect of the two preceding years, be in aggregate not less than HKD 30 million; and a market capitalization of at least HKD 2 billion at the time of listing; (ii) market capitalization/revenue/cash flow test: a trading record of not less than three financial years; a market capitalization of at least HKD 2 billion at the time of listing; revenue of at least HKD 500 million for the most recent audited financial year; and positive cash flow from operating activities carried out by the new applicant, or its group, that are to be listed of at least HKD 100 million in aggregate for the three preceding financial years; (iii) market capitalization/revenue test: a trading record of at least three financial years; a market capitalization of at least HKD 4 billion at the time of listing; and revenue of at least HKD 500 million for the most recent audited financial year. See HKEX, RULES GOVERNING THE LISTING OF SECURITIES ON THE STOCK EXCHANGE OF HONG KONG LIMITED, Chap. 8, available at http://www.hkex.com.hk/eng/rulesreg/listrules/mbrules/documents/chapter_8.pdf.
 On Dec. 31, 2005, the CSRC promulgated the Tentative Regulatory Rules for Equity Incentive of Listing Companies (ZHENGJIANGONGSIZI  No. 151) which came into force on Jan. 1, 2006. Under these rules, listing companies may establish equity incentive plan by means of stock options, restricted stocks or otherwise.
 For a deep analysis of the loopholes of China's regulation of direct overseas listing, see my paper, Direct Overseas Listing of Chinese Enterprises: A Clear Regulatory Framework and Explicit Regulatory Requirements are Needed, 3 JOURNAL OF SECURITIES OPERATIONS & CUSTODY 252, 252-267 (2010).
 Upon the ratification of the PRC State Council, the CSRC issued the Circular on Piloting the Reform of Listing Companies' Equity Division, which marks the beginning of the reform of listing companies’ equity division. See CSRC, CSRC ANNUAL REPORT (2007), CHINA FINANCIAL AND ECONOMIC PUBLISHING HOUSE, 2008, p. 56.
 See Erica Fung, Regulatory Competition in International Capital Markets: Evidence from China in 2004-2005, 3 NYU J. OF L. & BUS. 243, 243-299. See also Qi Bin et al., An Analysis of the Competition for China's Potential Listing Resources from Foreign Stock Exchanges, SHANGHAI SECURITIES NEWS, Feb. 9, 2007.
 See SAFE, ANNUAL REPORT OF CHINA’S FOREIGN EXCHANGE ADMINISTRATION (2009), p. 67, available at http://www.safe.gov.cn/model_safe/news/ts_detail.jsp?ID=20500000000000000,97.
 See Yuan Cheng, Listing Overseas: What is the Real Scope of the CSRC Circular?, CHINA LAW & PRACTICE 26, Sep. 2000, 26-27.
 One example relates to the HKEX listing company BYD Electronic (International) Co., Ltd. (HK: 0285, hereinafter BYD International). The CSRC issued the approval on BYD International's overseas issuance and listing on Nov. 14, 2007. BYD International seems to be a small red-chip company, as the beneficial owner of BYD International and its controlling shareholder, BYD Co., Ltd.(HK: 1211), is Mr. Wang Chuanfu, and BYD International carries its business mainly through its subsidiaries in the PRC Mainland. However, the CSRC made the above-mentioned approval with reference to the Grand Red-chip Circular. See CERTIFICATE OF APPROVAL, CSRC, CERTIFICATE OF APPROVAL ISSUED BY THE CHINA SECURITIES REGULATORY COMMISSION ON THE LISTING OF SHARES ON THE HONG KONG STOCK EXCHANGE BY THE RELEVANT OVERSEAS SUBSIDIARY OF BYD CO., LTD. (ZHENGJIANGUOHEZI  No. 36), CSRC BULLETIN, Iss. 11, 2007, p. 75. See also BYD International's 2007 IPO Prospectus (English version), p. 35, available at http://www.hkexnews.hk/listedco/listconews/sehk/2007/1207/LTN20071207001.pdf.
 Provisions on Mergers and Acquisition (2006), Art. 2.
 Published by the MOFCOM's Department of Foreign Investment Administration on Dec. 23, 2008, available at http://wzs.mofcom.gov.cn/accessory/200812/1230176759039.doc.
 Provisions on Mergers and Acquisition (2006), Art. 55.2; Foreign Investment Handbook, p. 68. Those relevant rules on the alteration of investors' equity in foreign-invested enterprises include but not limited to the following: (i) Provisions on the Alteration of Investors’ Equity in Foreign-invested Enterprises (jointly promulgated by the former MOFTEC and the SAIC on May 28, 1997, and effective as of the date of promulgation); (ii) Tentative Rules on Investment within China by Foreign Investment Enterprises (jointly promulgated by the former MOFTEC and the SAIC on Jul. 25, 2000, and effective as of Sep. 1, 2000); (iii) Provisions on the Merger and Division of Foreign-invested Enterprises (jointly promulgated by the former MOFTEC and the SAIC on Sep. 23, 1999, effective as of Sep. 1, 2000, and re-promulgated on Nov. 22, 2011 after revision).
 Ed Sun, Still Waiting for Regulation 10, 27 INTERNATIONAL FINANCIAL LAW REVIEW 20, Iss. 9, 2008, p. 21.
 Circular on Direct Overseas Listing, Part I, Section III.
 Id., Part I, Section II; Provisions on Mergers and Acquisition (2006), Art. 4.
 Provisions on Mergers and Acquisition (2006), Art. 11; Foreign Investment Handbook, pp. 68-70.
 The approvals from the CSRC for grand red-chip listing are available from the relevant issues of the CSRC BULLETIN.
 The origin of this policy may be traced to the Grand Red-chip Circular. It is emphasized in the Grand Red-chip Circular that “raising capital from overseas securities market by domestic enterprises shall take direct overseas listing of shares as the main form.” See the Grand Red-chip Circular, para. 6. However, no similar statement has appeared after the Grand Red-chip Circular. After the Provisions on Mergers and Acquisition (2006) were implemented, China’s policy guidance for domestic enterprises’ overseas listing has become somewhat unpredictable. For example, the attitude of the PRC State Council toward the use of foreign capital is to “continue to support eligible enterprises’ listing and issuance of shares abroad in accordance with China’s development strategy and their own development needs, in order to well exploit the overseas capital market and resources to continuously promote competitiveness.” See PRC STATE COUNCIL, SOME OPINIONS OF THE PRC STATE COUNCIL ON STRENGTHENING THE ADMINISTRATION OF UTILIZING FOREIGN INVESTMENT (GUOFA  No. 9), Part III (REALIZING DIVERSIFICATION OF THE METHODS OF UTILIZING FOREIGN INVESTMENTS), PRC STATE COUNCIL BULLETIN, Iss. 12, 2010, pp. 9-11. Nevertheless, the above policy guidance should be indeed in place according to other related documents and reports. For example, as the outcome of the Third China-UK Economic and Financial Dialogue held in Nov., 2010, “both sides reiterate their support for qualified Chinese companies, including listed companies, to list in London through the issuance of shares or overseas depositary receipts.” See HM TREASURY, COMBINED POLICY OUTCOMES OF THE THIRD CHINA-UK ECONOMIC AND FINANCIAL DIALOGUE, Section IV (FINANCIAL SECTOR DEVELOPMENT AND REGULATION), para. 27, available at www.hm-treasury.gov.uk/chx_asia_efd_outcomes_091110.htm. Strictly speaking, the above-mentioned “Chinese companies” should refer to joint-stock limited companies established in the PRC Mainland, not including the red-chip companies. For another example, on the Third China Enterprises International Financing Fair held in Shenzhen, China, in Jun. 2009, some official in charge of the MOFCOM's Department of Foreign Investment Administration said that the MOFCOM encourages the premium domestic enterprises to be listed in China securities market, but in the case that the domestic securities market runs out of room for listing, the form of direct overseas listing is also encouraged. See Ye Yong et al., MOFCOM Plans to Improve Regulation 10 to Encourage Direct Overseas Listing, SHANGHAI SECURITIES NEWS, Jun. 11, 2009.
 For an analysis of the defects and inadequacies, and the prospect of China’s regulation of direct overseas listing, see my paper, Direct Overseas Listing of Chinese Enterprises: A Clear Regulatory Framework and Explicit Regulatory Requirements are Needed, 3 JOURNAL OF SECURITIES OPERATIONS & CUSTODY 252, 252-267 (2010).