China’s securities regulator moves to suppress investor appetite for loss making companies

Mainland Chinese investors have traditionally liked to speculate on loss-making companies for a quick profit, but the China Securities Regulatory Commission is doing its best to break this habit.

Although China’s stock market is the world’s second largest with total market capitalisation of US$7 trillion, value investing – picking stocks based on intrinsic value and fundamentals – has yet to take hold in a country where individual investors dominate 80 per cent of trading.

In fact, betting on unprofitable companies is a long-standing tradition among local traders who believe these stocks will become targets for back-door listings and their share prices will soar.

However, such speculative investments may be disappearing as the securities regulator tightens approvals of back-door listings, raises the threshold for individual investors to buy unprofitable companies, and pledges to delist more loss-making stocks, according to Credit Suisse Group and Hengsheng Asset Management.

Of the 20 worst-performing stocks on the Shanghai and Shenzhen stock exchanges in the first half of the year, half were companies with losses for two consecutive years that risked being suspended or delisted, with fish-farming firm Hubei Wuchangyu and Xinjiang Zhundong Petroleum Technology shedding more than 50 per cent of their value.

“The regulatory system has suppressed the poor-quality companies,” said Chen Li, a strategist at Credit Suisse. “So it’s risk off.”