China’s securities watchdog said its moves to raise the bar for initial public offerings (IPOs), expel unqualified firms from stock exchanges and exercise greater scrutiny over high-frequency trading are ensuring the “survival of the fittest” although it does not expect delistings to “increase significantly in the short term”.
Since the beginning of this year, a total of 169 companies listed in Shanghai and Shenzhen have been marked as having potential financial issues or face the risk of delisting because of chronic financial problems. This compares with 164 in 2023, 184 in 2022, and 202 in 2021, according to an official.
The comments emerge after investors sold small-cap stocks amid concerns that heightened scrutiny from China Securities Regulatory Commission (CSRC) could eliminate smaller companies.
“The CSRC (China Securities Regulatory Commission) attaches great importance to investor protection work related to delisting, and insists on ‘pursuing to the end’ the illegal and irregular behaviours of the above-mentioned entities,” said a notice from the watchdog on Thursday.
The notice emerged after Chinese investors sold small-cap stocks amid concerns that heightened regulatory scrutiny could eliminate smaller companies.
The CSRC said earlier this year it will weed out unqualified IPO candidates to fundamentally improve the quality of public companies, as well as to deliver better returns for investors.
In the past month, more than 30 A-share stocks that were assigned “ST” or “*ST” statuses saw their prices decline for over 15 trading days, with a few falling under 1 yuan (US$0.14) per share, according to data compiled by Wind.
ST is short for “special treatment” and refers to companies that have potential financial issues. while *ST refers to companies that have consistently been assigned the ST status and could face the risk of delisting.
“ST and *ST statuses are designed to alert investors about companies’ relevant risks, and these statuses can be revoked once the stocks meet specific criteria,” Guo Ruiming, director general of the department of listed company supervision at the CSRC, said at a briefing on Thursday.
“Companies are assigned these statuses for a variety of reasons, including subpar financial performance, large amounts of funds being occupied by major shareholders, and significant deficiencies in internal control,” said Guo, adding that the watchdog is prepared to intensify its crackdown on financial fraud.
In April, authorities issued an unprecedented set of nine guidelines to push for greater transparency in the country’s US$9 trillion stock market and better protection of investors’ interests.
The document was published after “broker butcher” Wu Qing took the helm as the head of the CSRC in February. Wu, a veteran financial industry regulator, gained the sobriquet of “broker butcher” for spearheading the closure of more than 20 insolvent domestic securities firms in the aftermath of the 2008 global financial crisis.
“The main focus of the two exchanges in Shanghai and Shenzhen in the near future will be on the continuous supervision, punishment, and delisting of listed companies,” said Su Jinyu, an associate at Jingtian & Gongcheng, a Beijing-based law firm.
“Being designated ‘ST’ does not necessarily mean a company will be forced to delist, but it indicates a potential risk,” said Shen Meng, director at Chanson & Co, a Beijing-based investment firm. “In the meantime, a company could trigger delisting conditions and be removed from the market without being assigned an ST status.
“Small-cap stocks tend to be less attractive to investors due to their limited growth potential and higher risk of triggering delisting conditions, such as prolonged low market capitalisation. This concern causes investors to shy away from these stocks, leading to a continuous decline in their market capitalisation.”