For the last five years, China-based companies listed in major US exchanges have been on the radar of momentum investors, sending the stocks of these companies soaring: Baidu Inc up 1000 percent; Sohu.com, Netease, and Sina up 300 percent. Lately, these stocks are off the investor radar, as these companies have come under the scrutiny of both, US and Chinese regulators; and new IPOs like Renren, E-Commerce China, and Tudou have failed to excite investors.
One of the items regulators have been looking 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.