Beijing is reviewing the legal framework of so-called 'Variable Interest Entity' (VIE) corporate structures used by foreign-funded Chinese firms to transfer effective control of assets to foreign partners.
The review comes in the wake of a series of fraud scandals involving Chinese firms that used the VIE corporate structure to list in the United States, fuelling speculation that the controversial practice would be banned.
But according to venture capitalists and investment bankers with knowledge of the review, Beijing is studying how to 'fine-tune' VIEs, rather than outlaw them.
'The Ministry of Commerce is seriously studying the practice, and officials deny speculation that it will ban it [VIEs],' said Roman Shaw, managing partner of venture capital firm DT Capital Partners.
Shaw, who claimed to have had in-depth discussions on the issue with ministry officials, was speaking at an investment forum in Beijing earlier this month.
'In the long view, China wouldn't turn a blind eye to globalisation,' said Shaw - a reference to concerns that a crackdown on VIEs would hurt the flow of foreign investment into Chinese firms.
Under a VIE structure, Chinese firms and foreign venture capital funds set up an offshore vehicle which, through one or more foreign investment subsidiaries in China, enters into contracts with the Chinese firms. The contracts give effective control of the Chinese firms to the offshore vehicle.