The Chinese online search provider Baidu (BIDU) is soaring to new heights at some 70% year to date gains, even as BIDU is being forced to disclose warnings set upon them by US regulators.
Market regulators from the US — as well as Hong Kong — are forcing Chinese companies to give investors clear warnings about the risks of a legal structure commonly used to list shares. BIDU seems to be No. 1 on their list.
As Bloomberg reports, “the scrutiny follows some little noticed legal developments in China over the past 18 months that show the contracts behind the foreign listings may not hold up in court. It also casts a spotlight on the risks inherent in some of the world’s most sought-after investments just as Alibaba Group Holding Ltd. prepares for what could be the biggest foreign listing of a Chinese Internet company.”
Specifically, the US Securities and Exchange Commission is targeting Baidu — having sent BIDU two letters during the summer — make more disclosures concerning its corporate structure, in large part because foreign interests could very well lose their control and stake in the company.
At issue are “variable interest entities,” or VIEs, which are used to circumvent the Chinese government’s restriction on foreign ownership of key industries. The VIEs give overseas investors both the economic gains and losses of the business through contracts rather than direct ownership. About half the Chinese firms listed in the U.S. use the structure, and Internet and financial companies are among those that have virtually no other way to comply with Chinese law.
Both Alibaba — which owns cloud computing services and online search portals of its own — and online giant Qihoo 360 (QIHU) operate under this same Chinese law that could significantly impact investors.
As China’s largest search engine, BIDU is an example of an overseas stock with lots of potential.
Baidu stock has been steadily climbing over the past year — but recently Chinese companies have been given a boost, not just BIDU stock.
China posted its largest trade surplus in almost five years, growing by nearly $3 billion in one month. “There are signs that the global activity and trade cycle is gaining momentum, driven by the recovery in high-income countries, and China’s exporters are benefiting from that,” said Louis Kuijs, an economist at Royal Bank of Scotland.
Baidu provides Chinese-language Internet search services to enable users to find information online, including Web pages, news, images, documents and multimedia files, through links provided on its websites.
