Variable Interest Entities: China Ponzi Scheme
Commentary
Since 2000, Chinese issuers have widely used variable interest entity (VIE) structures to raise funds from American capital markets. The structure is often employed in industries where foreign ownership would be restricted or outright prohibited by Chinese regulators.
“Investors really are just playing fantasy football with the Chinese companies because they actually don’t own anything,” said Kyle Bass, founder and CIO of Hayman Capital Management, in a Nov. 22 report.
A common VIE structure would utilize a package of contractual agreements to link a Cayman-incorporated listed shell company with a China-based operating company. The terms of the contracts would provide for the distribution of revenue from the China-based entity to the Cayman-listed VIE. When American investors purchase shares on U.S. exchanges, they only buy the Cayman Islands company shares….