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Draft aims at weak shares

By Wang Jiamei  (Global Times)

08:19, July 30, 2012

China's junk shares may tumble significantly this week as recent draft regulations from the Shanghai Stock Exchange (SSE) on the trading of stocks bearing risk warnings are expected to curb speculation in poorly performing firms, experts told the Global Times.

The SSE announced on its website Friday that it is soliciting public opinion on this draft, which proposes the establishment of a risk warning board for the trading of stocks under special treatment (ST shares) as well as stocks with delisting risk warning (*ST shares) in order to better protect investors' interests.

The Shenzhen Stock Exchange may soon roll out similar rules following the release of the SSE's draft, the National Business Daily reported Saturday, citing an unnamed source.

A major change outlined in the draft is the lowering of the upper limit on daily price fluctuations for both ST and *ST shares to 1 percent, down from 5 percent. The downward limit of 5 percent currently in place would still remain. Moreover, on the risk warning board, if an A share closed below 0.50 yuan ($0.08), it would be allowed to increase by 0.01 yuan, or 2 percent, during the next trading day; while a B share would be allowed to go up by 2 percent if its closing price was below $0.05 during the previous trading day.

"It was easy for speculative investors to jack up the prices of junk shares because they are so cheap, but the newly drafted limit will restrain this phenomenon," Xia Wenqi, an analyst from Aijian Securities, told the Global Times.

Most junk shares in the mainland market are labeled as ST or *ST shares. Under the SSE's listing rules, the exchange will put stocks of listed companies suffering losses for two consecutive years under special treatment and give delisting risk warning to those with three consecutive years of losses. Currently, a total of 71 ST and *ST stocks are listed at the SSE.

At the same time, the unchanged downward limit is intended to encourage junk shares to drop and reflect their true value, Dong Dengxin, director of the Financial Securities Institute at Wuhan University of Science and Technology, told the Global Times.

The asymmetric limit could also push investors to withdraw their capital from the underperforming board, because most individual investors are not able to pull off short sales in the current market, upping their risk exposure and minimizing their chances of gaining, Xia said.

In addition, stocks to be delisted will also be traded on the risk warning board for 30 trading days, but their prices will be allowed to go up or down by no more than 10 percent each day, the SSE said in the draft.

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