China boots record number of companies from its bourses

(By Caixin journalists Yue Yue, Wang Juanjuan and Kelsey Cheng)

A record number of companies got the boot from Chinese mainland stock exchanges last year and that number could double in 2023, as regulators ramp up efforts to cull poorly performing firms and those that violate the rules or break the law.

A total of 42 companies were kicked from either the Shanghai or Shenzhen stock exchange in 2022, the highest ever and more than double the figure in the previous year, according to public information compiled by Caixin. The vast majority were delisted due to poor financial performance.

The trend is expected to pick up further in 2023. At least 80 public companies are in danger of triggering delisting thresholds linked to finances, according to Caixin calculations based on their third-quarter earnings reports. A company can be expelled from mainland stock exchanges based on certain parameters, which are grouped into four indicators - financial performance, share performance, compliance and violations of law.

Revised delisting standards issued by the Shanghai and Shenzhen stock exchanges, which took effect on 31 December 2020, seek to improve the overall quality of listed companies by lowering the bar to get kicked off. The revisions followed an October directive that year from the State Council that urged regulators to improve the delisting mechanism and simplify the process.

Regulators have been pushing ahead with enforcing the new delisting regime, specifically targeting "bad apples" as well as shell and zombie companies, according to Li Ming, head of the listed company supervision department at the China Securities Regulatory Commission.

Yet, last year's delisting ratio of less than 1% lagged in comparison with that of US exchanges, where according to a March 2021 report by Ping An Securities Co. Ltd., it was around 4% in 2020.

As of the end of December, there were more than 5,100 listed companies on the mainland stock market, with a combined market value of 79 trillion RMB (US$11.5 trillion).

Still, progress has picked up pace. The number of mandatorily delisted companies in 2021 and 2022 accounted for 40% of the total in the past 30 years or so, Li said at the annual Financial Street Forum on 22 November.

Among the firms that were booted last year, 39 were due to poor financial performance.

Under this indicator, a firm will lose its listing if it records negative net profit and at the same time, revenue of less than 100 million RMB for the most recent fiscal year. It will also get the boot if it has negative net assets at the end of the most recent fiscal year.

In terms of share performance, if a firm's stock closes below 1 RMB a share for 20 consecutive trading days or if its market value remains below 300 million RMB for 20 consecutive trading days, it will be delisted.

Compliance indicators include serious flaws found in a company's information disclosure or operations, and a situation under which more than half of directors cannot guarantee the authenticity of interim or annual reports disclosed by the firm.

For the category of major violations of law, a firm will be automatically removed if it is found to have committed fraud in its earnings reports or IPO.

Companies who are desperate to stay on mainland stock markets have used a variety of ploys to boost the appearance of their finances. These include cash injections from shareholders, being relieved of their debt obligations, or a reverse takeover by another firm seeking a backdoor listing.

Yet, there is increasingly less room for these firms to maneuver as exchange regulators have stepped up oversight to deter such practices.

For example, bad-debt manager GI Technologies Group Co. Ltd. - whose stock is under "special treatment" status, a label given to firms in financial distress or facing regulatory problems - has logged losses for three consecutive years and is nearing the delisting threshold based on its finances.

However, on 19 December, the company announced that it was going to receive a cash injection of no less than 700 million RMB from its controlling shareholder, a firm that was established just 11 days earlier.

The Shenzhen Stock Exchange immediately demanded an explanation from GI Technologies about the cash injection, and questioned whether the move was part of any plans to retain its listing status. On 3 January, the company issued a statement saying that the shareholder was unable to transfer the money due to issues with fund arrangements.

Clearly the regulator's work isn't done yet. In early December, the Shanghai and Shenzhen stock exchanges issued three-year work plans to further improve the quality of listed companies, which include further fine-tuning of delisting policies and strict supervision of their implementation.

Amid stricter delisting rules, protection of small and midsize shareholders is particularly critical, according to a recent commentary written by Zhang Wei, a vice chairman of the National Institute of Financial Research at Tsinghua University, and Qin Ting, a senior editor at the Tsinghua Financial Review.

"Small and midsize investors are the most foundational part of the securities market [on the mainland], and their interests are most easily violated," they wrote.

This article was first published by Caixin Global as "In Depth: China Boots Record Number of Companies From Its Bourses". Caixin Global is one of the most respected sources for macroeconomic, financial and business news and information about China.

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