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Underperforming firms face delisting

By Wang Xinyuan (Global Times)

08:10, July 09, 2012

Shanghai and Shenzhen stock exchanges, where China's A shares are traded, announced Saturday to tighten rules on underperforming public firms, lowering threshold for their delisting, in a move to curb speculation in the market and help improve the health of China's bourses.

Companies that have reported negative net asset values for three consecutive years will be delisted. Companies with an annual operating income of less than 10 million yuan ($1.6 million) for three straight years will also be delisted, the two exchanges said. The new rules are effective immediately.

If a listed company has less than 5 million shares traded over 120 consecutive trading days, or its share price for 20 consecutive trading days is lower than the face value of the stock, the company will get delisted too, according to both exchanges.

The original delisting rules focus on companies that reported net losses for three consecutive years, without specific requirements set on net asset or operating income.

The new rules will prompt investors, especially retail investors, to raise their risk awareness, Li Daxiao, director of the Yingda Securities Research Institute, said Sunday.

"The new rules mean more risks and losses from investing in underperforming companies," he said, "and they will lead investors to turn to companies with sound financial performance like blue chips."

The new rules will "lower the irrational market expectation toward the restructuring of (poorly performing companies)," Shenzhen Stock Exchange said Saturday.

Many retail investors used to buy shares of listed companies on the verge of bankruptcy and delisting at rock-bottom prices, in the hope that the company's stock price would surge after restructuring, so they can make huge profits by selling high.

"The new rules indicate that the regulator is trying to boost the share price of large cap blue chips," said Yuan Guangming, a retail investor with almost 20 years of investment experience in China's A-share market.

Yuan used to invest in underperforming companies and he said it was very rare for such companies to get delisted in the past.

But now he would invest in stocks of relatively small market capitalization but with sound financial performance, as prices of small cap shares have larger fluctuations and, therefore, carry prospects of big returns, as well as huge losses.

People are reluctant to buy large cap blue chips because they rarely offer dividends or allocate very small amount of dividends to shareholders, and their relentless refinancing moves through issuing more stocks leads to an oversupply of stocks and usually brings down the original share price. Therefore, it's very hard for investors to make money either through dividends or by selling the shares.

However, as large cap blue chips have large market capitalization and play important role in stabilizing the market index, China's stock regulator hopes to make them attractive to investors.


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