Financial regulation

China’s regulator gets tougher on firms for major law breaches and frauds, sending ‘special treatment’ stocks tumbling

  • A gauge of shell companies slump after the stock exchanges release new rules on delisting
PUBLISHED : Monday, 19 November, 2018, 1:01pm
UPDATED : Monday, 19 November, 2018, 10:55pm

Mainland Chinese companies tarnished by regulatory breaches or two straight years of losses fell on Monday, as regulators ratcheted up efforts to crack down on wrongdoings among listed firms and speculative trading with tougher delisting rules.

A gauge tracking 86 such companies on the Shanghai and Shenzhen bourses dropped as much as 1.5 per cent on Monday before closing 0.4 per cent lower, while the benchmark Shanghai Composite Index advanced 0.9 per cent. The Shanghai and Shenzhen exchanges said on Friday night that they will for the first time force companies that commit major violations, such as endangering state security, public safety, ecological safety and work safety to delist, effective immediately.

Among the decliners, Tianma Bearing Group, Shandong Longlive Bio-technology and China Security & Fire all slid by the 5 per cent daily limit, the maximum movement allowed for the “special treatment” (ST) stocks – the group of companies that have suffered two straight years of losses, have unusual financial conditions or have been fined for regulatory violation.

“The regulator isn’t too happy about the heavily speculative mood on the ST sector,” said Dai Ming, a fund manager at Hengsheng Asset Management in Shanghai. “The case of Changsheng Bio-technology offers a perfect case for the regulator to roll out tougher rules on delisting.”

The unveiling of the supplementary delisting rules is a follow-up measure in response to the severe law breaches by Shenzhen-listed Changsheng Bio-technology, which was found in July to have falsified data on rabies vaccines and has drawn the attention of President Xi Jinping who ordered a thorough probe into the case.

Troubled Chinese vaccine maker Changsheng faces delisting for endangering public security under revised rules

Even as Changsheng lost almost a total of 90 per cent of its market value over the past six months, the stock has seen frantic trading recently, with the share price jumping 41 per cent over the past seven days. The company has been suspended from trading since Monday pending the Shenzhen exchange’s final decision on whether to cancel its listing status.

The Chinese stock-market regulator has been long criticised for being lax with firms that do not actually meet standards required of listed companies. The leniency has fostered widespread speculation, particularly among retail investors, on unprofitable or poorly managed companies.

The case of Changsheng Bio-technology offers a perfect case for the regulator to roll out tougher rules on delisting
Dai Ming, Hengsheng Asset Management

Chinese traders prefer to wager on these stocks, or so-called shell companies that are often ramped up significantly because of rumours about becoming reverse-merger targets.

ST stocks are typical of such speculative sentiment, even though their classification by regulators was meant as a warning against investing in these counters. On the contrary, the sector has become a hotbed to bet on which company may be picked as a shell for back-door listing.

The regulator’s tougher stance on delisting would curb speculative demand among retail investors, according to Citic Securities which added that such speculation was unsustainable.

In the new delisting rules, companies found guilty of financial fraud in their initial public offerings will be banned from re-listing forever. Companies that are delisted for other reasons need to trade in the over-the-counter market for five years before they can apply for re-listing.

Two Shenzhen-traded companies Geeya Technology and Jiangsu Yabaite Technology have said they would fall immediate victims to the new delisting rules.

Geeya Technology, a ChiNext-listed company, issued a statement warning investors of the risk of investing in its shares on Friday night because of frauds in its IPO, while Jiangsu Yabaite put out a similar filing as it was found to have inflated revenues and earnings in 2015. Both stocks were halted from trading on Monday.