Chinese stocks use VIEs?

I came across this article in The Economist which talks about VIEs which Chinese companies use. Is this something to know or care about? I bring this up because several post about investments in Alibaba (BABA), Baidu (BIDU), Tencent (TCEHY).

A legal vulnerability at the heart of China’s big internet firms…
Sep 16th 2017
COMPANIES’ legal structures are usually mind-numbing fare. But occasionally it is worth pinching yourself and paying attention. Take “variable interest entities” (VIEs), a kind of corporate architecture used mainly by China’s tech firms, including two superstars, Alibaba and Tencent. They go largely unremarked, but VIEs have become incredibly important. Investors outside China have about $1trn invested in firms that use them.

Few legal experts think that VIEs are about to collapse, but few expect them to endure, either. …

What are VIEs? …

Alibaba, the world’s sixth-most valuable firm, illustrates how it works. …

For investors, there are two risks. First, the VIEs could be ruled illegal, potentially forcing the firms to wind up or sell vital licences and intellectual property in China. The second danger is that VIE owners seek to grab the profits or assets held within. If they refuse to co-operate, die, or fall out of political favour, it is far from clear that firms can enforce VIE contracts in Chinese courts.

I traveled to China for the first time in 2007. My wife is Chinese. I live in China about 1/4 of the time. I have relatives, friends and acquaintances in China. The more I learn about China and the quirky financial arrangements of Chinese corporations, the less inclined I am to invest in any Chinese asset class.

And I am personally fond of China and marvel at the great things these industrious, friendly and intelligent people have done since 1976 (the year of Mao’s death). No where on earth and at no time in history have so many people been lifted out of abject poverty so rapidly. Not a whitewash; there are enormous problems in China, but almost everyone over the age of 30 can remember a time when life was more harsh.

My wife bought a home before we were married. It’s a nice condo in the southwestern city of Guilin. She financed it under a 7 year contract which struck me as extraordinarily short term for such a large purchase. As I inquired more about it, I found that the Chinese government (which took over all the property in the country shortly after October 1949) never really relinquished their ownership. My wife actually holds a 70 year lease. I asked, “70 years from when?” The date the developer took out building permits? The date she closed (mind you, that would give everyone in the building a different lease period)? Exactly when is the “start” date? No answer, it’s ambiguous. What happens when the lease expires? Assuming there’s residual value in the property who gets it? Can the lease be renewed (mind you, the condo is fully paid at this time)? No answer, it’s ambiguous. And there’s a ton of other unanswered questions.

Even with this slew of unknowns, the real estate market in China is now and has been booming for years.

The linked article says, The enduring answer is for China to relax its foreign-ownership restrictions and open its capital account. Both foreigners and locals could buy into internet firms with a solid legal footing.

This is nonsense, written by a western journalist/investment analyst who apparently has no understanding of how China operates. The real situation is that there is no “enduring answer.” Few things in China (including a vast number of historical relics) endure. Especially when it comes to legal arrangements and financial assets.

Based on my personal knowledge and experience, I would advise that there are so many good investment opportunities, why would you even consider a Chinese company? I wouldn’t.