With a long-term potential for growth in China and its fast economic recovery from covid 19, China stocks have had a strong performance up to date. However, before jumping on any Chinese stocks for investment, you have to consider some of their risks.

Chinese accounting is not transparent compared to the US. It doesn’t have laws that support the shareholder’s interest. Moreover, Its government relation with the western government is not the best. Even Though these countries depend on one another for export, China would be more affected by cutting ties with the west.

For instance, China exports $40 billion worth of goods with the US per month, while the western country also owes them $1tr debt. Any breakdown of a relationship that cuts down export or prompts the US to refuse to pay their debt would debilitate China’s economy.

As a capitalist economy that runs in a communist government, China’s companies are always under threat. Even Though the government leaves these companies provided they stay out of politics, its regulations affecting these companies make their non-involvement impossible. Big Chinese companies that are more capable of challenging the government pose higher risks. The Chinese government may see a need to cut their wings anytime.

This article would explain three risky Chinese stocks and why they are dangerous investment options.

Didi (NYSE:DIDI)

Just like every other country, China has a body of regulators that ensures that the companies under it follow the state’s laws. However, unlike many other countries, China’s punishment for non-compliance is direr.

Before the it came, Chinese regulators told Didi to stay out of the IPO. Even if they want to, they should delay it. Didi ignored the regulator’s orders and went on to do the IPO which led to dire consequences. Now, the investors are bearing the brunt of Didi’s deaf ears to the regulator’s instructions.

This is not even specific to Didi or China. Any company that refuses to follow the instructions of the state, even if it is a juicy investment option, may not be the best fit for investing. These companies could end up shooting themselves in the leg. As Didi broke Chinese laws, it is not the best to put your investment into it, considering China’s stringent laws.

Alibaba (NYSE:BABA)

One of the Chinese giants, Alibaba is a good option for stock but it also has its risks. Recent happenings had brought the company into trouble.

The founder and highest shareholder of Alibaba, Jack Ma, put the company into trouble when he openly criticized the Chinese government for its laws and changes. Being a communist state, his action is a no-no for the Chinese government, considering his high-profile personality.

Also, as a dominant e-commerce company in China, Alibaba poses a problem to the government. The China communist state does not want single companies to have sizeable or absolute market control. They believe the company, no matter how big it is, should still be under the government’s control. No country wants a dominant company in its set up. The US also has some issues with Facebook due to its dominant size. However, being a communist society, Alibaba’s situation is much more complex.

Being a company whose founder has hassles with the government coupled with its dominant size that seems to threaten the Chinese government, it is safe to say Alibaba is not the best place to buy stocks

Qudian (NYSE:QD)

Another example of a Chinese which you should be wary of buying stock is an online customer lending company, Qudian. In US laws, company managers are controlled by shareholders. They are appointed by shareholders based on performance. If they are not performing well, they get dismissed. If they misbehave, they get jailed. These laws are not in China, thereby, doesn’t apply to Chinese stocks.

Qudian doesn’t pay dividends to its shareholders and claims to invest its profits into new businesses. The investors also receive little to no updates on the company’s growth or the progress of these small-time ventures. This makes it a very risky investment option.

The more nagging problem is that these shareholders are not protected by Chinese laws. They have less control over the management and running of the company.