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  • Forty firms have already lost listed status so far in 2024
  • Forced delistings could harm investors: Shanghai Prospect

China’s stock markets are set for a third straight year of record delistings driven by the jump in IPOs over the past decade and tighter rules introduced to weed out weaker members.

A total of 40 firms have already been removed from the Shanghai and Shenzhen bourses this year through Wednesday, and another nine have said they are also likely to be ejected, data compiled by Bloomberg show. That puts the total on course to beat the previous all-time high of 45 set in 2023.

“Given the uneven quality of firms during the flood of IPOs during the registration-based reforms, the number of delistings is naturally going to increase,” said Shi Peng, a fund manager at Loyal Capital Ltd. “However there are still constraints as investors suffer and mass delistings would bring bigger problems for confidence and stability.”

The number of firms gaining listed status on Chinese exchanges has boomed over the past decade, with as many as 503 IPOs taking place in 2021, up from just 46 seven years earlier. That followed the introduction of new rules aimed at encouraging more companies to go public through adoption of a registration system for initial public offerings, which streamlines the process.

Tougher Criteria

At the same time, the authorities have also stepped up measures to help improve the quality of listed entities. These included a raft of revisions announced in 2021 to shorten the delisting process and toughen the financial, trading and violation criteria that listed firms must adhere to.

Regulators in April introduced fresh conditions on top of the 2021 rules, broadening the scope of reasons for a company’s forced removal, including misappropriation of funds by shareholders. The changes included a lower tolerance for financial fraud, as well as enforcing higher market capitalization requirements for some companies.

The new measures were part of sweeping guidelines aimed at boosting the quality of listed companies in a bid to address some of the deep-rooted issues sapping confidence in the underperforming equity market.

‘One Yuan’

The vast majority of delistings this year have come about due to the “one yuan rule,” which is invoked when a stock trades under that level for 20 consecutive sessions.

Among those removed for other reasons, Yantai Yuancheng Gold Co. was ejected after it contravened the financial category. That came about after its revenue dropped below 100 million yuan ($14 million), it reported a net loss for 2022 and received a disclaimer of opinion by its auditor over its 2023 earnings.

While investors have generally supported efforts to delist companies that don’t meet minimum requirements, an overly aggressive policy may serve to undermine confidence.

The CSI 2000 small-cap gauge slumped more than 7% on April 16 following the publication of regulatory documents aimed at tightening stock-market supervision. It bounced back the following day after the China Securities Regulatory Commission said the latest delisting rules were meant to targeted “zombie” listed companies but not small-cap stocks as a whole.

“Forced removals have a devastating impact on share prices and bring huge harm to investors,” said Yang Ruyi, a fund manager at Shanghai Prospect Investment Management Co. “It’s crucial to enhance investor compensation in order for a the delisting mechanism to have its desired effect.”

Written by: Bloomberg News — With assistance from John Liu, April Ma, and Mengchen Lu @Bloomberg