U.S. Investors in China’s Internet Companies Face Risks

U.S. shareholders face “major risks” from investing in Chinese Internet companies such as Alibaba Group Holding Ltd. that use a variable interest entity, according to a U.S. congressional commission report.

Risks are associated with VIEs because the structures create holding companies to link foreign investors to Chinese firms via a set of complex legal contracts, according to the June 18 report by the U.S.-China Economic and Security Review Commission. There is a “high probability” Chinese courts will not uphold those contracts, the report said.