Ministerial Review

The regulations define sectors such as agricultural products and infrastructure facilities as broadly relating to national security. Transactions less than $300 million that otherwise could have been dealt with at the local level are now being referred to the commerce ministry for review, Ross said.

“In part because the national security regulation is at minimum vague and at worst broader than the published version indicates, local governments are paralyzed,” Ross said.

Services-for-revenue contracts like the one used by Yahoo and Softbank to tap domestic profits put off-limits by China’s rules have burned investors before. Foreign companies circumventing restrictions on investing in China’s telecommunications networks had their structures declared illegal in the late 1990s.

China Unicom spent at least 1.19 billion yuan ($144 million) compensating foreign partners including Sprint Corp. and Deutsche Telekom AG, according to its 2001 interim results.

Sharing Revenue

U.S.-listed Chinese companies like Baidu Inc. and Sina Corp. today use the same structure as Yahoo and Softbank, by arranging software licensing and other service contracts, in exchange for a share of revenue, with foreign investors.

As of April, 42 percent of U.S.-listed Chinese companies used the so-called variable-interest entities structure, or VIE, according to Paul Gillis, a visiting accounting professor at Peking University. The companies are concentrated in the Internet sector because of its restricted nature.

They also include educational companies such as New Oriental Education & Technology Group (EDU) Inc. which used a VIE in part because foreign ownership of primary and middle schools in China is prohibited, according to the company’s 2006 U.S. listing prospectus.