Beijing’s new red line: Offshore firms can’t ‘de-China’

FROM greater scrutiny of Hong Kong IPOs by companies with offshore structures to blocking Meta’s acquisition of Manus, Beijing is tightening its “look-through” supervision of companies with “Chinese DNA”.

On Apr 27, China’s National Reform and Development Commission halted the acquisition agreement between Meta and Manus, an AI start-up originating from China, shocking tech and investment circles.

Oversight extending from capital to data and talent

The next day, Chinese state broadcaster CCTV reported that the government is clamping down on non-compliant practices such as origin-washing and security risks arising from expanding to overseas markets, saying, “Regulation according to the law is a necessary measure for orderly opening up, and does not contradict the government’s stance in welcoming foreigners to invest or start companies.”

On Apr 29, Yuyuan Tantian (玉渊谭天), a social media account under CCTV, published a post emphasising that the government’s move to block Manus’s acquisition is not a ban on overseas expansion by Chinese AI companies, but to delineate non-compliance.

The social media post described Manus as a start-up that was incubated using domestic resources. Subsequently, it was driven by American factors to rebrand into a Singaporean company before being sold to foreign investors in a move to circumvent Chinese regulatory oversight. “It is only natural for the authorities to intervene in attempts to sidestep regulation,” the article wrote.

The post also mentioned that Manus’s key assets, such as its algorithm, data and talent, originated from or were developed in China; if Meta successfully acquires and gains control of Manus, its core technology and team would be entirely relocated overseas, so Manus should have declared and requested a national security risk evaluation. When it comes to regulatory oversight, the article also urged companies to confront problems directly, communicate sincerely and understand the purpose of regulation in order to build consensus.

Both start-ups and investment funds have been alarmed by the roadblock in the acquisition of Manus. Methods like corporate re-domiciliation, shifting headquarters abroad and doing away with offices in China that were used for “China-shedding” no longer work.

In fact, the “substance over form” logic behind look-through regulation did not begin with the Manus case. For more than a year, China has already placed capital market companies with offshore structures under greater scrutiny, and the Manus incident merely signals that the authorities have extended its coverage from capital to data and talent.

Dwindling Hong Kong IPOs by red-chip companies

Since the late 1990s, Chinese firms established shell companies in the Cayman Islands or British Virgin Islands as holding companies for their Chinese operations. These “red-chip” structures conveyed “foreign company” legal status, making it more convenient to raise capital and go public abroad, as well as to circumvent some Chinese regulatory oversight.

However, there has been a significant reduction in Chinese companies with red-chip structures going public in Hong Kong this year. Based on data collated by financial data platform Wind, as of Apr 8, out of the 41 companies to be successfully listed in Hong Kong in 2026, only two, or less than 5 per cent of them, have red-chip structures. The proportion of such companies was around 30 per cent in 2025. In the filing data from China Securities Regulatory Commission (CSRC), only one red-chip firm managed to obtain an off-shore listing filing notice during the first quarter of 2026.

Additionally, regulatory authorities have also requested some red-chip companies that intend to list in Hong Kong to move their main entities back to mainland China. AI company StepFun is reportedly in the process of unwinding its offshore entities to pave the way for its Hong Kong IPO.

In the Apr 9 edition of Securities Times (证券时报), a publication by the CSRC, it was mentioned that with the optimisation and adjustment in regulatory policies, red-chip structures have become “prudent exceptions” instead of the “preferred channel”.

Zhao Ya (pseudonym), a partner at a Beijing law firm, told Lianhe Zaobao that the Hong Kong Stock Exchange and CSRC have always discouraged the use of red-chip and variable interest entity (VIE) corporate structures due to their complex shareholding structures and risks of regulatory arbitrage.

Zhao shared that the creation of red-chip company structures was to make it easier for industries with foreign investment restrictions to obtain foreign capital and to enable the shareholders of companies listed overseas to reduce their shareholdings or receive dividend payouts. But from a regulatory viewpoint, the lack of effective oversight over overseas listings, fund-raising and tax collection results in capital outflow.

She noted that look-through regulation prioritises where a firm does its business and the origin of its technology over its nominal corporate structure. This goes beyond making it more difficult for red-chip firms to pursue overseas listings. Chinese authorities are now targeting overseas-listed companies with “Chinese DNA”, regardless of where they are domiciled, where their holding companies are based, or even whether their founders hold foreign citizenship.

Their aim is to bring these companies’ tax and shareholding arrangements, and capital operations back under the ambit of China’s regulatory framework. “Proper filing has to be lodged with the tax authorities for fund-raising, debt issuance and business trusts,” Zhao said.

Evergrande exposed wealth transfer through offshore structures

Chinese regulators have become far more alert to the risks associated with red-chip corporate structures following the 2023 asset-transfer controversy involving former property giant Evergrande Group.

Chinese media reported that the group’s founder, Hui Ka Yan and his ex-wife Ding Yumei transferred more than 50 billion yuan (S$9.5 billion) worth of dividends to their offshore holding company, and the money eventually flowed into their offshore trust.

After the abovementioned assets entered the duo’s trust, they are no longer classified as personal property under the law and therefore could not be used to offset Evergrande Group’s debt. In other words, Hui used offshore structures to transfer and ring-fence his wealth. In September 2025, judicial proceedings pierced the trust, and the Hong Kong High Court appointed Evergrande Group’s liquidators as the trust’s receivers.

Offshore structures enable capital raised through public listings and share dividends to flow out of China, and have been a tax enforcement grey area for the longest time. However, Chinese regulatory authorities are gradually plugging such gaps through systemic enhancements.

On Dec 26, 2025, China’s central bank and its State Administration of Foreign Exchange announced a new regulation that came into effect on Apr 1 this year. It stipulates that in principle, domestic firms are to repatriate funds raised overseas through public listings, or shareholding reduction and transfer. If it is necessary for companies to keep such funds abroad, approval must be obtained from or a filing has to be made with the relevant authorities.

Shell companies no exception

The principles of look-through regulation mean that shell companies used to evade tax have also come under the radar.

In February this year, Hello Group, the parent company of social app Momo, was required to pay 548 million yuan in further taxes. This was reportedly due to the tax authorities deeming that Momo’s parent company based in Hong Kong did not have operations that were substantial enough to qualify for the 5 per cent preferential tax rate for dividends paid, under an agreement between the mainland and Hong Kong, so Hello Group was taxed at 10 per cent instead and ordered to cover the shortfall.

Carl Liu, executive partner at Guantao Law Firm’s Beijing office, wrote an article that pointed out that China has fully implemented regulatory principles of “substance over form”. Through exchanging tax collection intelligence with global partners, using the Common Reporting Standard (CRS) and big data, Chinese tax agencies have precisely unmasked conduit companies and shell entities used for tax evasion.

Under the CRS framework, China is now able to engage in the automatic exchange of financial account information with over 100 countries and regions. This mechanism provides Chinese authorities with clearer oversight of its taxpayers’ offshore accounts, making both corporate and individual overseas earnings increasingly transparent. Since 2025, local tax bureaus across China have progressively launched audits into the unpaid income tax of Chinese tax residents on their foreign earnings, demanding settlement of these back taxes.

In March this year, Bloomberg reported that tax bureaus in Jiangsu and Shenzhen have requested from the ultimate beneficiaries of offshore trusts detailed financial information, including dividend income and investment gains from the sale of shares.

Beijing law firm partner Zhao Ya said, “From a legal perspective, assets in trusts don’t count as personal assets, but with a substance-over-form approach, tax authorities have deemed dividends and investment gains from shareholding reductions as personal earnings from abroad that need to be declared in accordance with the law.”

End of globalisation-era mentality

When interviewed, Tan Chong Huat, a senior partner at RHTLaw Asia, said that all the signs indicate that the Chinese government has moved beyond capital to include technology, data and talent within the scope of its oversight for domestic companies expanding overseas. Even if these companies are legally foreign entities, Beijing may continue to intervene as long as they are reliant on China for technology, talent, and research and development (R&D).

In the case of Manus, even though it moved its headquarters, the core of its team is from China, and its early-stage R&D and product prototype were completed in China, so it is still a firm with Chinese DNA.

Meta’s proposed acquisition would give it control over the brand, data and core team of Manus, and this touched a raw nerve with Chinese regulators because beyond the corporate entity, expanding overseas could also entail shifting its talent, technical capabilities and data abroad.

Ding Xinyan, founder of the Singapore Enterprise Growth Accelerator (SEGA), said when interviewed that geopolitics and the AI rivalry between China and the US have prompted China to focus on more than capital outflows to scrutinise whether its core technological capabilities and AI talent are being drawn abroad through offshore financing and overseas mergers and acquisitions

Ding also reminded entrepreneurs and investors of the need to cultivate a mindset of compliance and communication with regulators, as “the previous globalisation-era mentality of ‘flat structures and borderless capital’ is no longer applicable”.

This article, translated by Bai Kelei, was first published in Lianhe Zaobao as “特稿：北京收紧对”中国基因”企业监管”. THINKCHINA