 Good day, film investors. You can't own Alibaba and you are not owning it if you think you own the shares. We're going to go through six points to elaborate on what can happen to you as an owner of what you think are shares in Chinese stocks. So the story is all about tariffs, trade wars and the negotiations between the US and China are getting harder and harder. President Twitter, sorry, President Trump is playing hardball as the US deficit in relation to China is huge, huge and getting bigger. This is really a big deal, 566 billion, 3% of US GDP. That's huge. I can only say that and I agree it's huge. Huge amount of money. So we have these tariffs, everybody is trying to put more pressure on the other party, but what you are interested in is what can happen from an investor perspective. And that's what we are going to focus on because China can retaliate by hurting you directly, hurting the pension funds, hurting everybody in the US directly. Let's see. First, you don't own any business in China. So you think you own shares in Alibaba, Baidu, Tencent or some other Chinese stock and you might think you are exposed to the Chinese growth story as your own part of the fastest growing and largest businesses in China. Well, you don't own anything because China doesn't allow foreign ownership, especially on those sectors. Let me show you what I mean by discussing Alibaba and what is actually traded on the US stock exchange. So Alibaba is a typical variable interest entity, VIE. The foreign investors do not own shares directly in the Chinese operating entity, but rather own shares in an intermediary in the Cayman Islands. A wholly foreign-owned entity in the Cayman Islands provides capital to the Chinese entity that in return to a contract delivers the revenue or the profit to the Cayman Island entity owned by foreign investors. It's all based on a contract, we'll dig deeper. So the risk of the variable interest entity structure that has been adopted by many Chinese companies is that those are controlled via contractual agreements that are ultimately controlled by foreign investors. However, if such a company is in an industry category that is in the restriction category or on the negative list, the structure may be deemed legitimate only if the ultimate controlling person is a Chinese person. So a lot of those companies do not have the majority of owners that are Chinese. So this is something that's created to circumvent Chinese law. At any point in time, China can simply say these contracts are illegal and then you find yourself owning nothing. The Chinese owners own the Chinese company. They are the direct owners. The foreign shell company gives a loan to the Chinese company and with the contract they say they will provide the revenue to the shell company. However, that's just a contract which might be illegal in China because then foreign people own those companies and that's not allowed. So it's a bit of a gray area. This is Alibaba's corporate structure. The company directly owns foreign company, but what you own is the variable interest company and that entity has just contracts with the Chinese entity, just contracts, not direct legal ownership. The variable interest equity structure is currently the only way that foreigners may have an economic interest in businesses in Chinese restricted industries as telecommunications, e-commerce, mining, banking, private education and online games. So do you trust Jack Ma? The key of such a structure is to circumvent Chinese government restrictions. So as there is a contract and any contract can always be disputed and changed. For example, in 2012 Jack Ma decided to transfer the assets of Alibaba's online payment platform and financial and pay to a company owned by him. Yahoo and SoftBank that owned 44% and 30% of Alibaba went ballistic because that is what happens. You own something then in a moment you don't own it and that's exactly the risk of what can happen. They settled but now Alibaba owns just 33% of the company. It used to own 100% of it and they had to enter in August two years later into a share and asset purchase agreement that they negotiated with Ma to get 33% of the company and Ma got the rest. So at any point in time Jack Ma or other Chinese management can change the terms of the contract, can spun off something, can make things different, they can do whatever they want because you can't do anything to them. To go deeper into the story and financials that was established later includes Alipay, online banking, MyBank, credit scoring, service, landing place, Zao, Kaibao, probably pronounced it wrong and Fortune, Yubao and whatever. So as I said all those things you might think you own them but you don't and there is more. But let me first discuss that at any point in time China can declare those contractual rights on foreign ownership illegal and what you would end with is squat, nothing, no zero because if they deemed those contracts illegal you hold nothing in your hands and if you want to complain you can go to the Chinese legal system to complain. Good luck, I don't know how to say good luck in Chinese. So I don't think these risks might materialize but if hell breaks loose it might be a big threat to what's going on now on the trade war. For example in 2012 Chinese Supreme Court broke up one of the variable interest entities when it invalidated contracts made between Minsh and Bank of Hong Kong and its mainline proxy cutting off foreign investors from future profits. As I said you don't own and financial you don't control Alipay or its payment or its parent entity over which Jack Ma effectively controls a majority of the voting interest. Further something very important the licenses and domain names used by Alibaba in China are not owned by Alibaba they are owned by Jack Ma and Simon Xxi and have that have just agreed to allow Alibaba to use them and profit on them. So there is always the risk that the owners of those assets refuse to collaborate want to change the terms perhaps Jack Ma will collaborate but what if he dies will those who get his inheritance agree and will the Chinese courts take your side or their side. So it's always a risk to keep in mind people forget when things go good but look at what happened in Russia this might also happen in China. Then Ma and Xxi are using Baba's money to buy companies so they got a loan of 1.05 billion to buy 20% of Vasu. This is the deal so the Alibaba group gave Simon Xxi a loan so that they can buy Vasu media holding why would a company like Alibaba give a loan to one of its owners so that he can own 20% of a company and not buy the company itself because Xxi decided so so their interests are completely not aligned with your interest especially if you're a foreign owner because what kind of company gives a loan to the owner so that they can invest in another company they get the equity they get the ownership they get the growth you get a loan why wouldn't the company invest in itself. So that's what you get for doing business in China investors are currently blinded by the exorbitant growth shown in their financial numbers which is something also questionable but let's leave that for another video another point is the Chinese people cannot invest in the hottest Chinese companies will the communist country allow that because if you are a high school student in a salt lake city Utah or a college graduate in Berlin you can easily buy stocks in Tencent Alibaba and other Chinese tech giants if you're a student in Beijing you can't because you are not allowed to invest on other stock exchanges for how long will the Chinese government allow this if there is more pressure put on them in trade or other things to conclude it's not all about growth when it comes to investing in China and what seems one way on the surface looks a lot different when you dig a bit deeper however the points touched in this article are mostly just corporate governance issues but still things happen that would be severely punished in more transparent markets why isn't Alibaba punished well if you make trouble as a foreign investors you can soon lose your shirt as Yahoo and Softbank simply settled with Bapa and got only 33% off and financial not 100% as they owned in previous instances which would be normal in the western world so this is just the tip of the iceberg I'm investigating on whether their growth numbers shown by the Chinese companies are actually correct or are those companies cooking the books a bit to make things look better more about that in future videos so thank you for watching this time you don't see me because I'm doing a lot of things now today so click like if you like the content looking forward to comments thank you and I'll see you probably tomorrow