China stock delistings set to beat record as weak firms culled

shanghai - China is on course to see a record number of stocks being delisted from its exchanges in 2023 as new rules introduced to improve the quality of listed companies snare an ever greater number of victims.

A total of 21 companies have already lost their listed status on the Shanghai and Shenzhen bourses since the start of 2023, while another 22 have said they are at imminent risk of being culled, according to data compiled by Bloomberg.

The potential total almost matches the all-time high of 44 set in 2022, even though the current year is only halfway through.

Chinese regulators revamped delisting guidelines in 2021 as part of their efforts to clean up the stock market and bolster investor confidence.

The number of delistings jumped the following year, and has risen further in 2023 as the economic recovery from the Covid-19 pandemic has faltered.

“A macro slowdown, weak market sentiment, and expanded IPO (initial public offering) reforms are all factors behind the delisting and optimisation of stocks in the market,” said Shanghai Prospect Investment Management fund manager Yang Ruyi.

The rise in delistings is adding to speculation that other stocks with poor fundamentals will also lose their listing status, she said.

While the pace of delistings has sped up in 2023, the total is still less than 25 per cent of the number of IPOs.

China’s stock exchanges welcomed nearly 200 newcomers in the first half – more than any country in the world – swelling the combined number of listed firms on the two exchanges to over 5,000.

Here are some questions and answers about the surge in delistings.

Why were the tighter delisting rules introduced?

The new rules that took effect in 2021 expanded the criteria for possible delisting, and sped up the process of weeding out weaker listed companies. The main intention was to help encourage the listing of new and innovative companies under easier IPO rules. Among other reasons, regulators have signalled that a stronger capital market is critical towards gaining an edge in the tech race with the United States.

What triggers a delisting?

Delistings can be brought about in three main ways: trading levels, poor financials or illicit behaviour.

Among the triggers in the trading category are having fewer than five million shares changing hands for 120 sessions, a close below one yuan for 20 sessions and a market cap below 300 million yuan (S$56 million) for 20 sessions.

The financials category includes revenue below 100 million yuan coupled with a net loss; a net liability in the past year; an auditing firm issues an “adverse opinion” or “disclaimer of opinion” on its annual report; or certain types of administrative punishments from the securities regulator.

What are some of the large firms that were delisted in 2023?

Among the bigger companies that have lost their listings in 2023 are Sichuan Languang Development, which was removed in June after triggering the one yuan rule.

Bluedon Information Security Technology is also on track to delist, after it reported a net loss and revenue of less than 100 million yuan and announced a net liability.

Have some sectors been affected more than others?

Property firms have seen the most delistings, not surprising given their current financial stresses.

Investor sentiment towards the sector has worsened despite additional support from the authorities.

In addition to those already delisted, Yango Group is also facing imminent removal after triggering the one-yuan rule, pending a final hearing from the exchange. Approximately a dozen others are below or close to that level.

What does this mean for investors going forward?

The investment strategy of buying the worst-performing shares in the hope of a restructuring, a back-door listing or a similar turnaround story is fast being consigned to history.

That does not mean this is the end of speculative plays in China’s retail investor-heavy stock market, but it will help increase the shift towards fundamentals-driven investing. BLOOMBERG