Many analysts have been looking at the government for a solution of the dropping stock markets in China. But accounting professor Paul Gillis says investors – including the foreigners – should have a look at their own “irrational exuberance”, he tells CNBC.
Some of the most popular Chinese U.S.-listed stocks are Internet companies with a “VIE” structure, which stands for variable interest entity. Since China restricts foreign ownership in the domestic shares, the VIEs are a workaround that gives the companies access to U.S. capital through the NYSE and Nasdaq.
But the VIEs give foreign investors no actual share of ownership in the Chinese companies, no say in the company’s direction, and could actually be deemed illegal by the China’s court system at any point. Not to mention, the SEC doesn’t require the VIEs to disclose some past scandals, such as bribery and corruption.
“I’ve never seen investors invest in things they don’t own before,” said Paul Gillis, editor of The China Accounting Blog and an accounting professor at Peking University…
“It does seem that the government has lost control of the market and we are in a 1929-type crash situation,” said Gillis. “This is a case of irrational exuberance that finally popped.”
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