Increased regulatory scrutiny of US-listed Chinese companies could slow M&A activity, Moody’s says

Chinese companies are likely to take additional steps to comply with the additional rules, Moody’s analyst Roy Zhang says

The uncertainty surrounding VIE-structured Chinese companies listed in the US had caused equity sell-offs of more than US$1 trillion last year

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Chinese companies listed in the US face additional scrutiny from regulators, which could slow M&A activity, Moody’s said. Photo: Getty Images/AFP

Published: 9:00pm, 26 Sep 2022

US-listed Chinese companies with a variable interest entity (VIE) structure will face increased regulatory scrutiny, which could slow merger and acquisition (M&A) activity, Moody’s Investor Service said, adding another layer of uncertainty to firms entangled in ongoing audit reviews by American inspectors.

Compared with other US-listed peers subjected to the increased scrutiny by Washington under the Holding Foreign Companies Accountable Act (HFCAA), VIEs will face more competing requirements from regulators from both countries, the ratings agency said on Monday.

“Though we view increased scrutiny on companies with VIE structures as mostly manageable for rated issuers, we believe companies may be required to take additional steps to comply with rules,” said analysts led by Roy Zhang.

The report should help address some of the regulatory concerns surrounding VIE-structured companies. Alibaba Group Holding, which owns this newspaper, Tencent Holdings and Baidu are among dozens of such companies listed in the US.

The Moody’s report should help address concerns such as regulatory and governance risks surrounding VIE-structured companies like Alibaba. Photo: Bloomberg

VIE is a type of legal structure used by the Chinese firms to skirt Beijing’s regulation on restricting foreign investment in some sensitive industries and listing overseas. VIEs list overseas through a shell company that has links to onshore operating companies.