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As a vicious bear market unfolds in domestic Chinese stocks, U.S. institutional and retail investors in the country's securities that list here, like Alibaba, are feeling the burn.

But some experts question why many of these investors even own these stocks in the first place.

Some of the most popular Chinese U.S.-listed stocks are Internet companies with a "VIE" structure, which stands for variable interest entity. Since China restricts foreign ownership in the domestic shares, the VIEs are a workaround that gives the companies access to U.S. capital through the NYSE and Nasdaq.

But the VIEs give foreign investors no actual share of ownership in the Chinese companies, no say in the company's direction, and could actually be deemed illegal by the China's court system at any point. Not to mention, the SEC doesn't require the VIEs to disclose some past scandals, such as bribery and corruption.

"I've never seen investors invest in things they don't own before," said Paul Gillis, editor of The China Accounting Blog and an accounting professor at Peking University.



It's the blind, momentum buying of these types of securities that has contributed to the tremendous overvaluation in China's stocks listed everywhere, he said.

The 10 biggest VIEs, such as Alibaba and Baidu, have lost more than $40 billion in market value over the last month for U.S. investors as the Chinese stock market collapses.