The Associated Press article “Alibaba risk: China’s rise leaves out investors” relies on the premise that prior performance of Chinese stock is primarily the basis upon which to judge future profitability chances of the Alibaba IPO. The more challenging aspect to this offering is to understand that China has restricted foreign ownership of segments of their economy, e-commerce being one. To circumvent this, Chinese companies set up what amounts to front companies in the Cayman Islands, or elsewhere, which are said to control the Chinese entity. The Cayman entity facilitates foreign ownership through a variable interest entity, through which they issue shares.
The so-called “stock” in this IPO offering is not stock as we usually think of it because it represents no ownership rights such as voting your interest, equity rights or interest in the assets of the business. The VIE only promises the owner thereof a share of profits. This is not to say that the promise of VIE rights should not be considered, as some issued previously have been profitable. The business itself is quite promising, however, pressing foreign investors rights is an issue of its own and becomes the risky part of this consideration.
It is necessary to understand that the Alibaba IPO comes with the blessing of the current Communist government of China. The powers that be can change the way they view VIEs at will. It goes without saying that to press a case against abuse of a VIE contract would have to go through the courts of China and those courts are controlled by the government. This IPO and its aftermarket is a speculation more than a temptation and best left to the pros with deep pockets.
Paul Friedrich
Camano Island
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