Sunday, May 19, 2019

Recently, new progress has been made in legalization of delisting activities, marketization and normalization processes in both the Shanghai and Shenzhen markets. On the evening of May 15th, the Shanghai Stock Exchange decided to terminate the stock listings of ST (Special Treatment) Hai Run Movies & TV Production Co.,Ltd. and ST Shanghai Potevio Co Ltd.. The Shenzhen stock exchange also made the decision to terminate the stock listings of ST Chengdu Huaze Cobalt & Nickel Material Co., Ltd. and ST Zhonghe Co., Ltd.. Earlier this month, Leshi Web Information Technology (Beijing) and 9 other companies also had their stock listings terminated. These series of measures came as no less than a shock to the market, and have recently became a hot point of attention in the stock market. Chinese regulators' stance on the normalization of delisting has always been strengthening. In particular, the newly minted chairman of the China Securities Regulatory Commission, Mr Yi Huiman, mentioned in a recent speech that the regulatory goal is to focus on improving the quality of listed companies. He also mentioned that the disclosure of information makes up the lifeline of the market. Efforts to increase the quality of listed companies, strictly implement responsibilities on main bodies who delist, and bringing regulation to maintain the authority and strictness of the delisting system. These actions sum up the basic regulatory route taken by regulators, which is to take a top priority to ensuring the quality of companies that are listed.

Anbound's researchers feel that to perfect the mechanism of delisting and strengthen the "metabolism" of the stock market is to simultaneously strengthen the systemic ability of the stock market and allow the stock market to manifest a positive mechanism. From the statement issued by the Shenzhen stock exchange, we can also see that delisting mechanisms are a fundamental system that is required by capital markets. In fact, it helps purify the market environment, optimize the allocation of resources, effectively improving the market mechanism. Ever since the abnormal fluctuations shook the market in the latter half of last year, regulators have kept a tighter supervisory leash on listed companies, and there is the gradual improvement of the delisting mechanism. The aforementioned delisting of the four companies does not just happened overnight. Their problems are rooted in their mismanagement as well as in the regulatory aspects of their operations. Looking from an overall perspective, the frequency of companies being delisted have increased significantly from previous years. Since the start of 2019, there have been close to 10 companies being delisted. The Shanghai stock exchange said that it has formed an arrangement and practical operations for a normalized delisting system.

Having a complete delisting system will push the market to discover and search for intrinsic value and profitability instead of gambling on short term speculation. This shift will allow companies to look for long-term growth and establish sustainable businesses, slowly driving out short-term habits such as capital operations and money tied to listings from their places in the market, driving down their demand and appeal. In the past, it was rather difficult to delist A shares. According to a research of Yingda Securities, ever since the delisting risk warning system was implemented in 1998, delisting warnings (stock designations of ST or *ST) have been issued to the tune of around 800 or possibly more, as of April 30th, 2019. Ultimately, only 62 companies followed-through with delisting. Among the 3,610 companies categorized as A-shares, the delisting rate is a mere 1.71%. In comparison to the 8% annual delisting rate of American stock companies, the policies regarding A-shares are practically nonexistent, given their limited ability. Some people have described this massive influx of shares into the market and lack of companies delisting to be a massive one-way road. It looks like a huge influx of wealth into the market, but this perspective cannot be further from the truth. The lack of delisting reduced vitality in the market. Not only is the efficiency of resource allocation lowered, investors are forced to stomach much higher risks as well. This situation is effectively a major source of speculation and volatility that is present in the A-shares market.

The delisting mechanism successfully caused ST shares to fall. Even if the market is bogged down by the drop in ST shares, short-term losses are worth it given that they tend to assist the market in finding its "metabolism" and realize healthy growth again. In the history of A-shares, the worse a stock is performing, the higher is its possibility of undergoing a restructure activity. This is especially true for local state-owned enterprises. Delisting in this scenario is practically impossible. For companies, getting listed is basically being handed an immunity card. In the bull market run of 2015, the collective value of listed companies' cost of backdoor listing had reached more than 8 billion. This year, regulation has really impacted ST shares. Some short-term speculations have suffered losses, but this is largely seen as much needed price to pay to reform the A-shares market. Calculated from its peak point of April 18th, the Wind ST index has fallen 25.33%, and is the biggest loss among all indexes of concept stocks. It is now common to have 20 to 30 ST stocks down each day. The A-shares market has reached a new point where positive cycles of "metabolism" are promoted. The drop of ST share prices, which simultaneously shows the depreciation of shell resources, is the capital market indicating that value-based investing and a positive cycle is present again.

In the long term, the normalization of delisting from the stock market will also work to "clean-up" and tie down the atmosphere of the market. It will also gradually put an end to speculation, allowing investors to take on risks and gain value returns. In terms of the capital market, it will also remove any form of a bubble and allow the market to return to a healthier state. This definitely requires market supervision to step up its efforts on normalization and transparency, effectively reducing the space for capital operation. Anbound has pointed out before that various "shell resources" (companies utilized or acquired by parent companies not qualified to list in order to indirectly list on the stock market) are in high demand. These resources are used and sought after by various capital, but in fact this is not a normal phenomenon in capital markets. Taking listed companies as an example, if it is easy to list and stricter to delist, in addition to market supervision being in place, the value of these "shell resources" will be greatly decreased, to the point where no one is interested in them anymore.

Looking at another possible case, if China's financial market is free, fair and transparent, with a high degree of marketization, then the value of state-owned corporations as "shell resources" will also be greatly reduced. Additionally, related rent-seeking and unfair financing behavior will also be reduced.

Taking the innovative industry as another example, if it is not for the government's strong promotion to develop certain areas of innovation, use of government power to mobilize the inflow of capital or the introduction various strategic plans and industrial policies to stimulate certain industries, various policy opportunities will be difficult to form. The emergence of risks of a bubble taking place from the surplus of capital will also not be as frequent. Therefore, these kinds of positive system's ability and the construction of its mechanisms carry more weight than the level of the stock index.

Final analysis conclusion:

Overall, only with the perfection of the system to delist on capital markets, in addition to the gradual formation of market mechanisms and achieving the "metabolism" of the capital market, can we really realize the value discovery of capital markets, the effects of risk assessment and the long term stability brought about by an efficient allocation of financial resources.

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