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China Reverse Mergers and Variable Interest Entities

|Includes:China MediaExpress Holdings, Inc. (CCME), DYP

U.S. listed Chinese companies frequently use variable interest entities (VIEs) as a way to get around Chinese restrictions on foreign investment.  VIEs are owned by Chinese individuals but controlled by the listed company through agreements.

There is a significant development with respect to the use of variable interest entities in China.  Buddha Steel, Inc. (OTCBB:AGVO) filed an 8k on March 28, 2011 reporting that it had terminated the agreements with its VIEs because local government officials in Hebei Province had informed them that he agreements contravene current Chinese management processes related to foreign invested enterprises and, as a result, are against public policy.

It is not possible to say if this is a one-off case or signals a change in government policy, which so far has been to ignore these VIE agreements.  If it spreads, many of the U.S. listed Chinese companies are in deep trouble.

More information here:

Stocks: CCME, DYP