China: rule by law, not rule of law

Beijing’s sudden attack on the online-education sector is a wake-up call for global investors, says Edward Chancellor

Xi Jinping
Western portfolio investments could become a bargaining chip for President Xi Jinping
(Image credit: © CHINE NOUVELLE/SIPA/Shutterstock)

Investors received a rude shock last month when Beijing abruptly changed the rules for US-listed Chinese education companies. With one stroke, shares in TAL Education and New Oriental Education and Technology became almost worthless. The Nasdaq Golden Dragon index of Chinese stocks listed in New York fell to half its peak. Investors suddenly realised their legal claims on these foreign listings were extraordinarily weak. Foreign investments on the mainland may not be much safer.

Chinese companies listed in the US used a complex offshore structure known as a variable interest entity (VIE), which allowed them to evade restrictions on foreign ownership of Chinese media and technology groups. VIEs were always a questionable arrangement, neither condoned nor explicitly repudiated by Beijing. Western investors received dividends from the mainland company, but had no legal claim on its assets. This crucial information was in the listing documents. Most investors apparently didn’t read them.

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Edward Chancellor

Edward specialises in business and finance and he regularly contributes to the MoneyWeek regarding the global economy during the pre, during and post-pandemic, plus he reports on the global stock market on occasion. 

Edward has written for many reputable publications such as The New York Times, Financial Times, The Wall Street Journal, Yahoo, The Spectator and he is currently a columnist for Reuters Breakingviews. He is also a financial historian and investment strategist with a first-class honours degree from Trinity College, Cambridge. 

Edward received a George Polk Award in 2008 for financial reporting for his article “Ponzi Nation” in Institutional Investor magazine. He is also a book writer, his latest book being The Price of Time, which was longlisted for the FT 2022 Business Book of the Year.