China Herald: FTZ

Paul Gillis

For decades foreign and Chinese companies used tax heavens like the Cayman Islands and Bermuda´s as a way to circumvent restrictions in China´s laws. Now the country is closing that loophole, but last week also offered a way out for those who feared to be in trouble, writes accounting professor Paul Gillis at his weblog, at least for online ventures.

Paul Gillis:

The new MIIT (Ministry of Industry and Information Technology) rule provides an escape valve. It appears limited to companies operating in online data processing and transaction processing (operating e-commerce). It is unclear to me how far that definition will stretch.

Many foreign multinationals operate in China through the VIE structure. Only a few have disclosed this fact, since disclosure is only required when the VIE operations are material to the company as a whole. Amazon, CBS, and Pearson Education have disclosed the existence of Chinese VIEs. The new rule seems to help Amazon, and it is less clear whether CBS or Pearson Education will be able to take advantage of it.

The law might also be used by some of the overseas listed Chinese companies that will have difficulty complying with the new foreign investment law. Tencent cannot put in place the control structure required because the Hong Kong Stock Exchange does not allow it. Ctrip does not have a dual class share structure or sufficient Chinese ownership to demonstrate Chinese control, and the new rule might provide an out for them.

It is also unclear to what extent operations will have to be moved into the Shanghai Free Trade Zone in order to qualify for the new rule. Such is the nature of Chinese regulation; implementation details will take some time, even though the new rule is already effective. Many overseas listed Chinese companies are in the process of going private from the US exchanges with the intent to relist on China’s frothy boards. I believe this trend is less motivated by changes in VIE rules than the high valuations currently available on Chinese exchanges.

More at the ChinaAccountingBlog.

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+Mark Schaub

Most attention has gone to the chances of the financial industry at the new Shanghai Free Trade Zone, but while those opportunities might occur in the long term, niche markets like gaming companies can already win today, argues lawyer Mark Schaub, Partner at King&Wood and Mallesons, in a legal note.

Mark Schaub:

China has effectively blocked gaming consoles since 2000. To put this in perspective the PlayStation 2 was released way back in 2000. In 2000 China banned the manufacture and sale of gaming consoles due to the possible adverse effects of violence and explicit content upon China’s youth.

However, this fourteen year blanket ban is seeing a slight unraveling as the new FTZ will, uniquely for China, allow console manufacturers to produce games and consoles for China’s domestic consumption. Naturally enough, the game manufacturers have not been given a green light to produce anything they want as they will still have to submit products to regulators for approval. Accordingly, do not expect to see a Chinese version of Battlefield 4 coming out of Waigaoqiao but non-controversial games will be able to be sold directly to the China market from the FTZ.

Further, the new regulations will allow for manufacturers in the FTZ to sell gaming consoles to Chinese consumers. Ironically, although gaming consoles have been produced in China for export for years, sales to the domestic market were banned. Microsoft entered into a $237 million joint venture with BesTV New Media in the FTZ at the end of 2013 to make home entertainment equipment, which could potentially include games and consoles.

The FTZ lifting of the blanket ban will lead many optimists to posit a huge untapped market that gaming console operators like Microsoft and Sony will need to immediately enter. Revenue in the PRC gaming industry grew by 38 per cent year-on-year in 2013 to RMB 83.2 billion. However, this market has been dominated by online computer and smartphone games, with PC games claiming two-thirds of the market in 2013. Due to the ban, gaming consoles have not only been driven to the sidelines but are also comparatively expensive in China...

The different threads of new FTZ policies come together to potentially allow for great opportunities to gaming companies.

On the one hand the obvious opening is the ability for game console and game manufacturers established in the FTZ to sell their products into China. More subtly the liberalizing of restrictions in the VATS sector may provide far greater opportunity for video game distributors to access the China market. China often embraces new technologies quicker than the West and by putting games on the cloud, the game distributors will be able to better meet consumer demands and taste while also confronting the serious piracy problem as games are stored on the cloud rather than individual devices.

Is this all too good to be true? Time will tell but at present it does seem that the video game sector may well have more to be happy about than many other, more heralded sectors.

You can read the full paper here.

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