8 Risks Of Investing In Chinese Companies

China is the largest Internet market in the world and it's growing. As of June 2011, China's Internet users reached 485 million, an increase of 27.7 million from the prior year.
However, China’s Internet stocks have been taking a beating lately. Most recently, last Friday some of China’s strongest Internet companies suffered their biggest losses of the year.
While a total shutdown of these sites is unlikely, it is important to understand the many risks these companies face.
Censorship
The most obvious forms of censorship are the complete blocking of a site or restrictions on content, which has been used against companies such as Facebook, YouTube, and Google.
But even if they comply with China's censorship policies, companies could face many other financial costs tied to controlling information on their sites. Digital Due Diligence explains: "The government counts on microblog providers to police the postings and expunge objectionable material that mechanical filtering does not block. Furthermore, since Baidu required verification of real identities, “each query costs Baidu 5 RMB and rumors are Baidu [Shuoba] had at most 5 million registered users,” estimates Bill Bishop of DigiCha."
Forced company closure
This is unlikely to happen to major players that have established themselves as household names domestically and respected Chinese brands internationally, but smaller and newer entrants may face the risk of being shutdown by the government.
Also, no matter how popular a site is, if it is starting to seriously facilitate public uprising or the organization of dissenters it will face the ire of the Chinese leadership. This threat is getting more serious in recent days, and Xinhua anticipated the more recent challenges in this threatening article released in August.
Opaque business structures
The recent coverage of the VIE issue has brought attention to the questionable legal structures of Chinese Internet Companies. And even if it turns out the legal structure is OK, the reputational harm surrounding the current uncertainty may linger.
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See Also:
- Deutsche Bank: 7 Reasons Why Chinese Stocks Could Fall Another 15%
- Here's Who Has To Pick Up The Pieces If China Lands Hard
- These 10 American States Would Get Crushed In A Trade War With China
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