The risky loophole Chinese companies have been using for years

When investors purchase a stock, what they're doing is buying a percentage of the company. Right! Wrong! At least when it comes to many of the Chinese companies listed on the Nasdaq and the New York Stock Exchange. That's because Chinese companies use a structure called a variable interest entity, or VIE, in order to raise money from foreign investors.

What's a VIE? The structure uses two entities. The first is a shell company based somewhere outside China, usually the Cayman Islands. The second is a Chinese company that holds the licenses needed to do business in the country. The two entities are connected via a series of contracts. When foreign investors buy shares in a company that uses a VIE, they're purchasing stock in the foreign shell company — not the business in China.

For example, when US investors buy shares in Chinese ride-hailing firm Didi, which went public in June on the New York Stock Exchange, what they're actually doing is buying stock in a Cayman Islands company called Didi Global.

Read more