China's market regulator released tougher delisting rules yesterday, which analysts hailed as a major step forward in restoring order in the speculation-plagued market.
News about the rules, which take effect on January 1, triggered sell-offs in money-losing firms, a prime target of the move.
Many of the Special Treatment (ST) firms, which have been losing money in two consecutive years, plunged below their 5 percent daily limit in the morning session.
"Given that market fraud and loss-making has been on the rise, the aim is clear - to strengthen regulation of listed firms," said He Qiang, director of the Institute of Securities and Futures under the Central University of Finance and Economics.
The new rules, replacing an older version released in February, allow stock exchanges to suspend trading in shares of listed companies that have posted three straight years of losses.
Such firms, or Particular Transfer (PT) firms, face the fate of being tossed out of the bourses if they fail to report a profit in the next half a year.
And the new rules effectively shorten the one-year grace period to six months.
"Delisting is an indispensible step in improving the performance of China's stock market," the China Securities Regulatory Commission (CSRC) said in a press release.
While the Company Law stipulates that listed companies recording a loss for three years in a row should be delisted, regulators have balked at the move due to concerns that small investors may be bearing the brunt, as well as opposition from protective local governments in the listed firms' home cities.
PT firms, instead, were still allowed to trade, although on Fridays only. Together with ST counters, they became the favourate of Chinese punters, and have seen their share prices soar on speculation that they may rebound on the back of State-sponsored restructurings.
The ST practice was abolished by the new rules.
"They used to be dragging their feet on the reform," He said, "but the move means that the PT system was ineffective."
Stamping out the speculation-ridden sector would pave the way for a more sensible investment philosophy among China's individual investors, analysts said.
"Now the investors should learn to be more prudent in their investment and pay more attention to the fundamental factors of the listed companies," said Hu Ruyin, director of the Shanghai Stock Exchange's research center.
"At the same time, it put more pressure on the listed companies to improve their performance."
The new rules are also a step closer to the international standards that the government has been pursuing since China's entry into the World Trade Organization, Hu said.
But the news may continue to depress market sentiment in the near term as investors may subsequently become more pessimistic about market trends, brokers said.
"In the long run, it will help the market grow mature," said an analyst at Haitong Securities. "But in the near term, investors will be pessimistic before they accept the new game rules."
China now has about 60 chronic money-losing listed companies - 16 of them PT and the rest ST counters.
Three money-losing firms had been removed from the list of China's 1,100-odd public firms since the previous delisting rules were introduced in February.
The first delisting came in April, when washing machine maker PT Shanghai Narcissus Electric Appliance was kicked off the Shanghai Stock Exchange.
(Xinhua News Agency December 6, 2001)
