China’s red-chip structure – long used by internet companies to attract foreign capital while navigating domestic restrictions – is facing renewed scrutiny as regulators tighten oversight of offshore listings.

The shift is already reshaping the pipeline for Hong Kong initial public offerings (IPOs), with companies increasingly being encouraged to unwind these structures or justify why they remain necessary.

This explainer outlines the reasons behind the policy shift, what it means for tech IPOs, and what it takes to unwind the structure.

What is a red-chip structure?

The term “red chip” dates back to the 1980s, when Chinese state-backed firms used offshore entities to control Hong Kong-listed companies.

In the internet era, this evolved into the widely used variable interest entity (VIE) structure. It allows foreign investors to gain exposure to sectors such as telecoms and the internet, which are otherwise subject to restrictions on overseas ownership.

Typically, a company sets up an offshore holding entity – often in the Cayman Islands – which controls a Hong Kong subsidiary. That subsidiary, in turn, establishes a wholly foreign-owned enterprise (WFOE) in mainland China. Rather than owning the operating business outright, the WFOE controls it through contractual agreements.

The model was pioneered by Sina for its Nasdaq listing in 2000 and later adopted by major firms including Alibaba Group Holding and Tencent Holdings. Alibaba owns the South China Morning Post.