Jeopardy of Investing in Chinese Companies - Essay Example

The article further considers the issue of shares and notes that shareholders did not purchase shares in the organization, but instead a United States company; the confusion arose because the original company was incorporated in the United States to avoid Chinese business restrictions.

While ChinaCast was the latest such occurrence of corruption, the article notes this is a frequent occurrence in China. Sino-Forest, a Chinese company based in Canada, was perhaps the most prominent such case. Sino-Forest was recently accused, by Muddy Waters Research of fraudulent activities and accounting practices. The subsequent investigation attested to no specific accounting fraud by did demonstrate a variable interest entity was in effect; this is the same situation that occurred with ChinaCast.
Other elements of Chinese investment demonstrate that the ownership of assets can only be temporary. Yahoo recently found itself involved in a disagreement with Jack, the chairman of the Alibaba Group, after he used defensive tactics to transfer Alipay to a private company controlled by him. The issue was highly challenging as Yahoo owns a substantial stake in the organization, and his transfer of the company demonstrated that he was willing to go to extremes to ensure that he was the only purchaser of specific assets.

Additionally, there have been over 105 Chinese companies that have been delisted from the Nasdaq stock exchange. While not all situations are involved in fraud, the article notes that the variable interest entity structure is one of the most prominent challenges for investors. Even Chinese companies that have gained prominence as American investment outlets have implemented this structure. For instance, Baidu, the Chinese version of Google, implements a variable interest entity structure. In this specific instance, the company’s assets are actually controlled by the company’s executives.

Ultimately, the article indicates that an investment in Chinese companies is not an investment in the company itself, but in the people that run the company. While in many situations such occurrences prove fruitful for all parties involved, as ChinaCast Education demonstrates it is not always worth the added risk that is accompanied by a lack of a strong regulatory environment. So far, the United States government has failed to pressure China on any of these issues.