NewChinese investors dump ‘junk stocks’ amid tougher stance from regulators

Chinese investors are finally dumping shares in loss-making companies after years of speculation on them in a sign that punters are at last taking seriously tighter regulations and new delisting rules that make holding their stock a huge risk.

The struggling firms have often been market outperformers as they were almost never delisted, providing an implicit floor on downside risk that speculators have exploited to their advantage.

But Beijing’s broad efforts to reform its capital markets, and in particular recent rules aimed at fostering a robust stock market and efficient allocation of capital, signal an end to such policy aberrations.

“Tighter rules and stricter implementation are pushing investors away from ‘junk’ shares’,” said Xiao Shijun, an analyst at Guodu Securities. “It’s an attitude reversal; investors are finally turning to blue chips, given their surprisingly high returns of late.”

An unprecedented 38 firms published obligatory formal delisting warning statements in December, many citing fraud investigations as the cause, after the China Securities Regulatory Commission issued tougher delisting rules in October.

So long as CSRC enforces the rules, most of these 38 firms will be kicked out of the Shanghai or Shenzhen stock exchanges within a year, though in the past the regulator has failed to walk the talk.