Seven out of 10 habitually loss-making firms traded on the mainland expect to post profits for last year as they attempt to shore up earnings to avoid delisting.
According to the state-owned Securities Daily, 70 per cent of the 100 "special treatment" firms that have published their forecast performances for last year said they would turn to profits.
The result could embarrass the chairman of the China Securities Regulatory Commission, Guo Shuqing, who has promised to expel underachieving firms from the stock exchanges as a way to safeguard investors' interests.
Special treatment firms are those companies that report losses for two years in a row. They could face delisting if their results are in red ink for a third consecutive year.
The Shanghai and Shenzhen stock exchanges published new delisting rules in April last year to toughen controls over the loss-makers.
Under the rules, underachieving firms could no longer count on exceptional gains to avoid delisting, as the bourses would look at their underlying profits to decide whether these firms could maintain their listing status.
But the two exchanges waived the rules in July, phasing out the criterion on one-off gains and letting firms rely on the profits derived from one-off deals to avoid delisting.
At that time, the rule change sparked concern among investors and analysts that dozens of special treatment firms would make an all-out effort to dress up their earnings.
A fund manager at Dazhong Insurance, Wu Kan, said: "The exceptional gains should have been factored out when the exchanges judged the loss-making firms' quality. Those which report underlying profit in red must be expelled so as to protect investors."
As an example, Beijing CCID Media Investment, the first special treatment firm to publish its earnings report for last year, said its net income hit 1.36 million yuan (HK$1.69 million), up from a loss of 29.9 million yuan in 2011.
However, factoring out the one-off gain from a disposal of an asset in Hainan province, CCID posted losses of 11.9 million yuan.
Observers believe that most of the special treatment firms that forecast earnings for last year will show massive exceptional gains in their full-year reports. Mainland firms are required to publish their annual reports between January 1 and April 30.
Before Guo became chairman of the CSRC, only 50 habitual loss-makers lost their listing status, accounting for 2 per cent of the number of firms. Many perennial loss-makers resorted to so-called asset-restructuring deals to avoid delisting.
Guo, a reform-minded regulator, has been adamant in overhauling the ailing stock market by introducing market-based policies. But the new policies have yet to effectively bolster retail investors' confidence.
Early last year, Guo urged individual investors to buy into blue-chip stocks while guaranteeing an 8 per cent annualised return. But thousands of investors who followed his advice found themselves stuck with paper losses after a lacklustre market performance.