In its latest move to facilitate the delisting process and curb excess speculation, stock exchanges in Shanghai and Shenzhen are planning to launch a new board where companies waiting to be delisted will be traded before their removal from the exchange.
In Shanghai, China’s biggest bourse posted a guideline on its website on Friday and is seeking public opinion over the measures for terminating the listings of poorly performing companies.
The delisting rules target companies that are underperforming or trading poorly. These so-called “special treatment” companies are those with negative net asset values for two consecutive years, significant financial and accounting reporting errors or those that have violated disclosure rules. Listed companies with shares trading below par value or Rmb1 ($0.15) for 20 consecutive trading days are also classified as “trash stocks”, as they are known in China.
Only a small fraction of companies meet the definition at the moment, though that may change as disappointing results continue to filter through.
There are currently 128 stocks in the A-share market facing the risk of delisting, representing slightly more than 5% of the 2,417 stocks traded in Shanghai, according to Changjiang Securities.
The new stock-delisting rules are part of broader financial reforms to China’s capital markets. The absence of a delisting mechanism has heightened volatility, encouraging speculators to bet on the dramatic fluctuations of underperforming stocks.
Soon after he took the office, China Securities Regulatory Commission chairman Guo Shuqing said that an efficient system to delist companies would be introduced by mid-year and “should be launched on the foundation of an investor-protection system”.
According to the guidelines, companies will be traded on the new board for 30 trading days before being completely removed from the bourse.
During their remaining days on the exchange, shares must trade within a required price range. The upper limit of the daily price movement is 1% while the lower limit is 5%. On each trading day, an investor can only buy a maximum of 500,000 shares in trash-stock companies, the guidelines suggested.
The delisting rules may deal a big blow to China’s B-share market, which quotes shares in US and Hong Kong dollars, and has for a long time suffered from low liquidity. It is widely expected that Tsann Kuen, a maker of electric appliances, will be the first company to delist. The company said in a statement to the Shenzhen stock exchange that its stock had closed below Rmb1 for 15 straight days as of July 27. The stock ended 9.8% lower at HK$0.55 ($0.07) yesterday.