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Junk shares plunge after Shanghai bourse announces new proposal

By Wang Xinyuan (Global Times)

08:47, July 31, 2012

ST (special treatment) or junk shares collapsed Monday after the Shanghai Stock Exchange proposed a draft to make it difficult for share prices of such stocks to rise, a move aimed at preventing speculation on junk shares and encouraging delisting of such shares.

Almost all ST shares traded Monday saw their prices tumble 5 percent - the downward limit for daily price fluctuations, compared with the previous trading day.

The Shanghai bourse announced Friday a proposal to cap the daily price increase of such stocks at 1 percent from the current 5 percent, while maintaining the maximum limit of the daily drop at 5 percent. Under the new rule, it will be difficult to make money from junk stocks, and chances of incurring losses will increase.

"The new measures are part of the regulator's efforts to lead investors toward value investment from speculation, yet it will take a long time to achieve such a transition," Chen Min, a strategy analyst with Founder Securities, told the Global Times.

Stocks are listed as junk shares or ST if the listed companies have suffered losses for two consecutive years or are on the verge of delisting following three consecutive years of losses.

Currently, 149 ST shares are traded on the Shanghai and Shenzhen stock exchanges, among which 77 stocks, or about 51 percent, are traded in Shanghai, China Central Television (CCTV) reported Monday, citing data from Wind, a market information provider.

The Shenzhen Stock Exchange may soon roll out similar rules, the National Business Daily reported Saturday, citing unnamed sources.

Retail investors usually speculate on low priced ST shares because the companies have small market capitalization which can be easily manipulated. Most of the junk shares manage to avoid delisting by restructuring, and their share prices hike and generate lucrative gains for investors when the companies resume trading.

"It will not be a surprise if ST shares collapse," Lin Yi, a retail investor said on his Weibo Monday.

The new measures will direct capital away from junk shares to blue chips, said Wu Xuan, director at the wealth management center with Rising Securities.

But it remains unclear where the money will flow to in the short term, as the overall market is sluggish and some investors may even quit the market, Chen said.

Due to the market slump caused by a slowing economy, about 220,000 trading accounts were reportedly closed in the first half of the year.

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