Chinese AI Startups Accelerate Shift to Domestic Registration

Policy Winds Shift as AI Firms Rush to Re-domicile

Several leading Chinese AI startups are reportedly considering dismantling their offshore holding structures in favor of direct registration in mainland China. Notable AI companies such as Moonshot AI and StepFun have put this transition on their agendas, in what is seen as the latest signal of Beijing's tightening grip on the AI industry.

The move comes after Chinese securities regulators sent a clear message following Beijing's decision to block Meta's acquisition interest in AI startup Manus: companies intending to pursue IPOs should complete their registration domestically. This directive has directly fueled a wave of "de-offshorization" across the AI sector.

Why Offshore Structures Were Once the Industry Standard

For years, Chinese tech startups have widely adopted VIE (Variable Interest Entity) structures, establishing offshore holding companies in jurisdictions such as the Cayman Islands. The core advantages of this arrangement included:

• Ease of accepting USD-denominated investments: Dollar-denominated funds from top-tier firms like Sequoia Capital and Hillhouse Capital have traditionally preferred investing in offshore-structured companies
• Paving the way for overseas IPOs: Capital markets in New York and Hong Kong offered well-established listing pathways for offshore-structured entities
• Flexible equity incentive arrangements: Offshore structures provided greater flexibility in designing employee stock option plans

When AI newcomers like Moonshot AI and StepFun were founded, most followed this industry convention, building their corporate governance systems around VIE structures and securing substantial backing from USD-denominated capital.

The Strategic Logic Behind Regulatory Tightening

Beijing's push to bring AI companies back onshore is driven by multiple strategic considerations:

First, national security and data sovereignty. Large language model companies possess vast troves of data and core algorithmic capabilities, making their strategic value increasingly prominent. By anchoring corporate registration domestically, regulators can more effectively oversee critical areas such as data flows and technology exports.

Second, preventing the leakage of core technologies. The Manus acquisition episode served as a wake-up call. If an AI company's offshore structure were exploited by foreign capital, control over critical technological assets could slip away. Keeping corporate entities onshore erects a fundamental firewall.

Third, nurturing domestic capital markets. China is vigorously developing homegrown capital market platforms such as the STAR Market and the Beijing Stock Exchange. Guiding high-quality AI companies toward domestic listings enriches the pool of tech-sector offerings on A-share markets while allowing domestic investors to share in the growth dividends of the AI industry.

Real-World Challenges of the Transition

However, dismantling a VIE structure is far from straightforward. Industry insiders point out that the process involves several complex dimensions:

• Coordinating shareholder interests: Proper exit or conversion mechanisms must be arranged for existing USD-fund investors
• Valuation system conversion: Switching from USD-based to RMB-based valuations may create downward valuation pressure
• Legal and tax costs: Corporate restructuring entails cross-border legal compliance and potential tax liabilities
• Financing channel adjustments: Future fundraising will rely more heavily on RMB-denominated funds, yet the depth of domestic RMB capital pools for AI remains limited

Nevertheless, with the policy direction clearly defined, proactively embracing the change is evidently the more pragmatic strategy for companies.

Industry Impact and Future Outlook

If this trend continues to expand, it will have far-reaching implications for China's AI ecosystem. In the short term, some startups reliant on USD financing may face funding pressures. Over the long run, however, domestic registration will help companies more smoothly access government resources, participate in public-sector projects, and realize value through domestic capital markets.

Notably, this policy shift could also accelerate the "decoupling" of the Chinese and American AI industries. As Chinese AI companies fully transition to domestic structures, their connections to international capital markets will narrow further, potentially sharpening the emerging "bipolar" landscape in global AI.

For rapidly growing AI companies like Moonshot AI and StepFun, finding the right balance between regulatory compliance and business development will be a central challenge in the period ahead. The ultimate trajectory of this "homecoming wave" will profoundly shape the future map of China's AI industry.