Chinese concept stocks have been so weak, and one big reason is the VIE structure. Foreign investors simply don’t dare to touch it.

A recent Xiaohongshu layoff case is a great example.
Just before taking the options, Xiaohongshu’s South China direct sales head Chen Hao was laid off, with the goal of denying him his equity.
Chen Hao wasn’t an easy target—he sued directly in court, arguing that he had been the top salesperson for years; why claim his competence was lacking and lay him off to forfeit his equity.
The court ruled in Chen Hao’s favor.
But there were dozens of employees in similar situations. Under Chen Hao’s lead, those dozens also sued Xiaohongshu.
In response, Xiaohongshu cited the VIE structure and argued that the contract was signed with a Cayman company, not Xiaohongshu—claiming they were two separate entities.
The court said that the contract was indeed with the Cayman company, so it falls outside the court’s jurisdiction. The matter then came to an end.
It just so happened that Xiaohongshu is preparing for a Hong Kong stock listing this year. In its prospectus, the Cayman company’s control over the domestic entities is written in black and white, and in reality it is the same company.
So Chen Hao and the others filed suit in Hong Kong, saying that at the time Xiaohongshu told the court—black on white—that the domestic entity and the Cayman company were two different companies, but during the listing it said they were one and the same.
Who is lying, then? In any case, either Xiaohongshu misled the court or misled the HKEX. As a result, Xiaohongshu’s listing process has been paused.
We won’t even talk about the company itself—just this brilliant “VIE” structure has already made countless foreign investors step back. Big short burry previously wrote an article saying foreign investors are genuinely afraid of the VIE structure, fearing that in a single night the shares could go straight to zero.