In two days, the market value of New Oriental Education & Technology Group Inc. more than halved. The controversy is yet to be figured out, but we know for sure that the dramatic collapse owes partly to deep-rooted investor concerns about the use of the variable interest entities (VIE).
The term VIE has become as familiar to investors after last year's Alipay dispute as credit default swap was after the financial crisis. In China, a VIE is most often associated with circumventing foreign investment restrictions. It refers to a corporate structure in which a domestic firm holds an operating license in areas where foreign investment is prohibited or restricted. The domestic firm, on the other hand, is bound by agreements and contract to have its rights and obligations controlled by a foreign entity, which can go public overseas.
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