For more than five years, Chinese Internet companies enjoyed an easy fast ride into US exchanges, cashing in on the US investor fever and fascination with China’s enormous economic potential; and sending the stocks of these companies soaring: Baidu Inc (NASDAQ:BIDU), up 1000 percent; and Sohu.com (NASDAQ:SOHU), Netease (NASDAQ: NTES0, and Sina (NASDAQ:SINA) up 300 percent. Recently, the ride has turned bumpy, however, as new IPOs haven’t been fared that well, as Renren Inc (NYSE:RENN), E-Commerce China (NYSE:DANG), and Tudou (NASDAQ:TUDO) declined in price soon after they made their debut to US Exchanges.
What made this ride easy and fast is a controversial Chinese corporate structure, Variable Interest Entity (VIE). This structure has allowed Chinese companies to list their shares in US Exchanges through “reverse mergers”—a practice that has drawn the scrutiny of US regulators, due to a string of accounting irregularities among these companies. Now, VIEs have come under the scrutiny of Chinese regulators, the China Securities Regulatory Commission (CSRC), which has asked the State Council to take action against VIEs.
This is certainly bad news for Chinese Internet companies that have abused this listing vehicle, as they run the risk of being delisted. It is also bad news for Chinese companies lined up to list their shares in US Exchanges in the future, as the Chinese government may do away with VIEs altogether. But it is good news for healthy Chinese companies that have played by the rules, as they no longer will be stigmatized; and for investors as it improves financial market transparent.