Home > Vol. 84 > Issue 84:2 > China’s Variable Interest Entity Problem: How Americans Have Illegally Invested Billions in China and How to Fix It

China’s Variable Interest Entity Problem: How Americans Have Illegally Invested Billions in China and How to Fix It

Samuel Farrell Ziegler
84 Geo. Wash. L. Rev. 539

U.S. investors have invested over $70 billion in Chinese companies. Many of those investments—by some estimates most—are illegal under Chinese law. Some of China’s largest companies, including nearly half of the Chinese companies listed on U.S. stock exchanges, are participants in this scheme to facilitate illegal investment. The illegal status of these investments is abused by corporate insiders in China who steal assets owned by U.S. shareholders with impunity, and there is a constant threat that the Chinese government may crack down on these illegal investments at any time. The situation is unsustainable, and the threats posed to U.S. investors and the global economy are colossal. The mechanism enabling this dysfunctional system of international investing—the “variable interest entity” corporate structure—is at the root of the problem and must be replaced. This can be accomplished through a robust U.S.-China bilateral investment treaty, which will allow the U.S. and Chinese governments to fix this broken system before more U.S. investor money is lost and the global economy is placed in greater jeopardy.

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