New Oriental, China’s biggest private educator, makes money from English-test preparation. That has helped revenues to grow about two-fifths annually over the past five years. Yet its US-listed shares are back where they were at the start of 2009 – thanks to analysis by Muddy Waters Research, questioning the ownership of some of New Oriental’s schools and the consolidation of its financial statements. Once again the probes put into question the variable interest equity structure often adopted by Chinese companies tapping overseas markets for capital.

That leaves Baidu, Ctrip, Sinaand Renrenamong those vulnerable to criticism because of their VIE structures. VIE came about in the 1990s when lawyers crafted a way to circumvent restrictions on foreign investment into “sensitive” sectors. The authorities accepted, however, that capital would be good for its nascent internet industry so turned a blind eye. VIEs include at least one domestic company with Chinese owners, an offshore holding company and a foreign-owned enterprise.

Some VIE structures are more risky than others. But in every case foreign exchange restrictions prevent profits made in China from flowing out of the country (no dividends). Foreign investors lack recourse to onshore assets. Various revenue-generating entities make it hard to deconstruct consolidated results, and management structures do little to promote good governance and investor participation.