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SSE may change tough new rule

By Wang Xinyuan (Global Times)

08:50, August 08, 2012

Shanghai Stock Exchange announced Tuesday a modification of a new draft rule aimed at a more prompt delisting of ST (special treatment) or junk shares. The announcement triggered concerns that the exchange was backing down on measures to combat excessive speculation in the market.

Some investors had opposed the draft rule, saying that it was too harsh, the SSE said in a statement published Tuesday.

"We will make changes and improvements to the draft after soliciting public opinions," it said, noting that the new rule will be implemented on January 1, 2013.

The SSE issued the draft on July 27 that would limit daily rises of the ST shares to just 1 percent while retaining the original limit of a 5 percent fall in daily trading prices. Almost all junk shares fell sharply the day after the rule was unveiled.

If a poorly performing company volunteers to be delisted, it could get relisted after improving its financial performance, and the relisting would not need approval from the China Securities Regulatory Commission, the SSE said.

Stocks are listed as junk shares if a company has suffered losses for two consecutive years or is on the verge of delisting.

"The trading limit is key to the effectiveness of the delisting rule. If the SSE changes or cancels it, it becomes meaningless," said Dong Dengxin, director of the Financial Securities Institute at Wuhan University of Science and Technology.

A change or modification will be regarded as a compromise, which would thwart the progress made in prompting junk shares to delist, Dong said.

Another rule of the SSE stipulates that a listed company will be delisted if its share price falls below its face value - 1 yuan ($0.16) in most cases - for 20 consecutive trading days.

With the trading limit set in favor of a price fall, many junk shares could soon see their prices falling below 1 yuan, resulting in a swifter delisting.

But this draft rule caused complaints among many retail investors and criticism that it would lead to a further sag in the market as it could lead to less activity in stock transactions. "The new measures have no regard for investor's interests," Li Hanwen, a retail investor, complained on Sina Weibo.

Xie Wei, a researcher at the Institute of Finance and Banking under the Chinese Academy of Social Sciences, noted that the change in stance of the market regulator had confused investors.

Retail investors often speculate on low-priced ST shares because the companies have a small market capitalization, which can be easily manipulated. The junk shares can avoid delisting through restructuring, and their share prices can then rise and generate gains.

The regulator will launch similar measures to fight against speculation and lead investors toward value-investment, said Meng Liang, a manager with Shenzhen-based UBS SDIC Funds.

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