The mainland's top securities regulator plans to expel perennial loss makers from the stock market.
Guo Shuqing, appointed chairman of the China Securities Regulatory Commission (CSRC) in October, intends to set up a delisting mechanism in the first half of this year.
He told reporters on the sidelines of the National People's Congress in Beijing yesterday that a delisting mechanism on the main board could help curb overspeculation while safeguarding investors' interests.
Guo's statement adds to evidence that the reform-minded chairman is determined to bring a sea change to the mainland market. His plans include overhauling the controversial mechanism for initial public offerings, encouraging local government pension funds to invest in equities and creating a market for high-yield corporate bonds.
Talk of setting up a delisting mechanism began a decade ago but has gone nowhere.
Since the mainland stock market was established in 1990, most companies that have gone public have been controlled by local governments, and their IPOs have been aimed more at raising funds than sharing the business with investors.
Habitual loss-makers would usually be rescued by the local governments, which would inject profitable assets into the listing vehicles.
Mainland-listed firms that post losses three years in a row are demoted to the Securities Trading Automated Quotations network, an over-the-counter market. But most of these underachievers have been bailed out after they have reported losses for two years.
Thousands of investors have flocked to these embattled firms, betting that the governments concerned would rescue them through asset restructurings.
'Most of the small investors lost money on this type of speculation,' said West China Securities trader Wei Wei. 'Without a real delisting mechanism, speculation on loss-making firms will continue.'
The creation of a delisting system would pit the CSRC against the local governments, because their officials would try to prevent their companies from being thrown off the exchange.
'Guo is showing that he's a good enforcer of reforms,' said Haitong Securities analyst Zhang Qi. 'Investors have reason to believe him.'
Before Guo took up his position, the CSRC was studying the option of creating a delisting mechanism for the Nasdaq-style ChiNext market, because a tenth of the firms showed sharp profit declines immediately after being listed on the startup board, which was launched in 2009.
Guo will now turn his attention to such a delisting system after announcing plans to establish a similar mechanism for the main board.
Last month, Guo, former chairman of China Construction Bank, said the mainland's 300 largest stocks were good buys because they were undervalued. He predicted the blue-chip firms would generate an 8 per cent return for investors who bought them at the time.