Foreign Invested Enterprise (FIE): Foreign company has a direct ownership in a PRC company.  China's State Administration for Industry & Commerce (SAIC) requires audited financial documents.  An FIE can also be referred to as a wholly owned foreign enterprise (WOFE).

An example of an FIE is Zst Digital Networks (NASDAQ:ZSTN), where Zhengzhou Shenyang Technology, Ltd. conducts 100% of operations.

Domestic Owned Enterprise (DES): A company owned by Chinese individual(s) and/or entity(s). In many cases, the FIE will hold an equity interest in another PRC company.

SAIC does not require audited financial documents for a DES.

An example of a DES is Weikang Bio-Tech Group (OTC BB:WKBT) where the FIE is Weikang Bio-Engineering Co., Ltd. and the DES is Tianfang  Pharmaceutical Co., Ltd., which brought in 72% of total sales during 2009.

Variable Interest Entity (VIE):  Direct ownership in a PRC firm is not established. The flow of funds is set forth by a series of contractual agreements that establish control without direct ownership.  In this structure, an FIE is usually established first.  The FIE then procures a contractual arrangement with another PRC company as a VIE relationship . The net income of the VIE flows through the FIE to the foreign holding company (in the U.S.). SAIC does not require audited financial documents for VIE.

An example of a VIE is China Mediaexpress Holding (NASDAQ:CCME) where operations are conducted through Fujian Fenzhong.

A company can utilize a combination of  ownership structures.

An example of a combination structure is Vlov Inc (OTC BB:VLOV); The FIE is Dong Rong Company (in China) and the VIE is Jinjiang Yinglin Jinduren Fashion, which currently conducts all operations. The equity owners of Yinglin Jinduren intend to transfer all of the business operations currently conducted by Yinglin Jinduren to China Dong Rong sometime in 2010). No DES exists in this example.

Those who use SAIC documents to insinuate fraud must have a very good grip on company structure. They must be certain that the SAIC filings of the PRC companies are those of the FIE and represent the majority of business for the holding company. For example, in some cases the FIE has limited operations with most of the revenues derived from companies in which it holds ownership interests (DES) or contractual arrangements (VIE). 

Please note that Joint Venture relationships are also common in China.

Sino-Foreign Cooperative Joint Venture (CJV)

"A CJV is a joint venture between a Chinese and a foreign company within the territory of China. The Chinese company usually provides the labour, land use rights and factory buildings, while the foreign company brings in the necessary technology and key equipment, as well as the capital. This joint venture is based on a cooperative joint venture contract in which matters like the terms of cooperation, the division of earnings, the ownership of property upon the termination of the contract term of the CJV, the sharing of risks and losses, etc are laid down."

Sino-Foreign Equity Joint Venture (EJV)

"This type of foreign investment is currently still the most widely used in China, even though Wholly-Foreign Owned Enterprises (FIE) are developing strongly. It is a limited liability company (This means that the investor or partner is not personally liable for the debts that the company might make in the future) and it has the status of Chinese legal person. This is a crucial difference with a RO because unlike the latter, a Sino-Foreign Equity Joint Venture (EJV) is capable of buying land, hiring Chinese employees independently, constructing buildings, etc. An EJV is a joint venture between a Chinese and a foreign company within the territory of China. Both companies invest in the joint venture with the foreign company, in general, not investing less than 25% of the total investment."

The SAIC requires audited financial statements for both of these joint venture relationships.

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