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Investors hope delisting rules will reform ChiNext

Shanghai Daily, April 27, 2012

• New delisting rules for companies on ChiNext, China's version of Nasdaq, are aimed at cleansing the troubled market of poorly performing stocks and helping restore investor confidence.

  On May 1, the technology start-up board, based in the southern city of Shenzhen, will start implementing rules published by the Shenzhen Stock Exchange on April 20.

  Stocks will be delisted if their prices fall below their par value for 20 consecutive trading days. Companies will also be jettisoned from the bourse if they have been censured three times for irregular practices or misrepresented their assets.

  The regulations further tighten the standards for re-listings, strengthen warnings to investors about possible delistings and prohibit backdoor listings.

  "The reforms are the most comprehensive delisting system to date in China's A-share market," independent analyst Pi Haizhou wrote in a commentary on Tuesday.

  ChiNext was launched in October 2009 to help smaller, innovative business get crucial funding for expansion. But the board has proved a disappointment to investors, with companies poorly performing and stock prices plummeting below often-inflated initial offer prices.

  In 2011, the combined profit growth of ChiNext companies tumbled by half to 17 percent from a year earlier. A research report by CICC in April said the earnings outlook for ChiNext companies this year is not optimistic.

  China has been aggressive in helping companies go public but woeful in establishing mechanisms to weed out what some call "garbage stocks."

  Only 50 companies have been delisted from China's stock exchanges since PT Narcissus was bounced from the Shanghai Stock Exchange in April 2001. That represents a meager 2 percent of the 2,400 companies listed in Shanghai and Shenzhen.

  Reformers' focus

  ChiNext has been a particular focus of reformers.

  Many underperforming companies have managed to get on the board through backdoor listings and have managed to stay there by manipulating the system. Many have gone public with wildly inflated price-to-earnings ratios, only for their prices to crash within months of listing.

  A new accounting system introduced in 2007 allowed some companies to include one-off revenue, such as government subsidies, as part of their profits.

  "This gives companies that are on the verge of delisting a chance to linger in the market," independent analyst Zhou Junsheng said on his blog on Monday.

  To eliminate the stalling tactic, suspended companies must submit supplementary information to the Shenzhen exchange within 30 trading days or there will be no appeal on the road to delisting.

  Analysts said they expect the crackdown on backdoor listings, whereby private companies get on the board by acquiring public ones, will deal a big blow to the current tactics.

  "The measures will hamper speculation in garbage stocks and give them a more reasonable valuations," Dong Dengxin, head of the financial research institute at the Wuhan University of Technology, wrote on the Twitter-style Weibo network.

  The new delisting system will help investors sift good stocks from bad, said analysts.

  "Investors will be able to invest more easily in companies of good quality and abandon those that are bad," Li Daxiao, head of the research institute at Yingda Securities, told International Finance News.

  The reforms are also intended to force companies to focus on their core businesses. Under the new rules, companies will not be allowed to make major changes in their business plans while they are under suspension.

  Little room for tricks

  Independent market watcher Tan Haojun said the reforms leave little room for all the tricks companies have used to disguise poor performance.

  "As long as companies don't show big improvement in their operations, they will not be allowed to continue stock trading," he wrote in a commentary.

  While the market in general has welcomed the new reforms, analysts still find flaws. For example, the rules provide no punishment mechanism for delisted companies that have deceived investors. Nor are senior executives of a delisted company held responsible for irregularities committed during their watch.

  "Small investors have to pay the price when a company is delisted, which is unfair and not good for market stability," said independent analyst Zhang.

  Pi said penalties for falsified accounting need to be strengthened. He cited the example of biological technology company ST Yunnan Greenland, which was found to have falsified accounts in 2009. The company's share price subsequently plummeted to 3.67 yuan from its initial public offer price of 16.49 yuan, but the company remains listed.

  "To a certain extent, the lack of strict regulation on false auditing means the regulators have turned a blind eye to the malpractice," he said.

  The reforms haven't had much positive impact on investor sentiment yet. On April 23, the first day of trading after the new regulations were announced, the ChiNext Index lost 5 percent.

  The new delisting rules will put 16 ChiNext companies on the cusp of delisting, according to financial data provider Wind. But the process is cumbersome, meaning that delistings under the reforms may not actually occur before 2014 or 2015.

  Market watchers expect the tougher ChiNext rules to be rolled across all China's equities markets eventually.

  "A strict and effective delisting system is going to lower high IPO prices and high price-to-earnings ratios of all A shares," said Wuhan University of Technology's Dong.

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