A-Share Companies Face Delistings as Stocks Dip Below Par Value (AI Translation)

【周刊提前读】A股多公司面临“面值退市” 制度坚韧度待考

The delisting reform in the A-shares market, initiated four years ago, aims to eliminate "zombie companies" and "bad apples" through enhanced regulatory measures [para. 1]. As of early 2024, the Shanghai and Shenzhen stock exchanges have delisted 45 companies, a number that matches the entire delistings for 2023 and exceeds new listings for the first half of 2024 [para. 2]. Many of these companies were delisted primarily because they failed to meet the market value threshold under transaction-based delisting rules [para. 3][para. 4].

Historically, the A-share market saw 76 companies delisted due to their stock prices closing below the par value of 1 yuan for 20 consecutive days [para. 3]. This year alone, more than 30 companies have fallen into this category, driven by an overall market downturn and insufficient fresh capital [para. 4]. Experts suggest that these companies typically face compliance deficiencies or financial breakdowns [para. 5].

The market's response to face value delisting is mixed. Some believe the system should incorporate elements of the U.S. stock market, like reverse stock splits and grace periods for rectification, allowing companies more time for recovery [para. 6]. On the other hand, critics argue that this system exacerbates the current market downturn [para. 7]. Implementing mandatory delisting in China has always been complex, influenced by major shareholders, local governments, and the interests of small and medium investors [para. 8].

The CSRC's opinion from April 2024 emphasizes stringent delisting standards and diversifying delisting channels through mergers and acquisitions [para. 9]. Nevertheless, over 220 million individual investors in the A-share market often engage in speculative behavior on small and mediocre stocks [para. 10][para. 11].

Data comparisons between the U.S. and A-share markets indicate stark differences in transaction value distributions. In the U.S. market, the top 5% of companies by market capitalization account for nearly 65% of the total transaction volume; in contrast, A-shares’ top 5% make up only 25% [para. 11]. Despite several rounds of investor education, many retail investors continue to speculate, contributing to the A-share market's status as a weak-form efficient market [para. 12].

Effective investor protection mechanisms are essential to reduce resistance to the implementation of the delisting system. However, the regulations on civil compensation using administrative fines have not yet been practically applied [para. 13][para. 14]. Delisting invariably affects investors, who often lack recourse and effective compensation, causing them to oppose the process strongly [para. 15].

The new rules introduced since 2020 require delisting if a company's stock price falls below 1 yuan or its market capitalization drops below 300 million yuan for 20 consecutive trading days [para. 16]. With these regulations, the number of delisted companies surged, reaching 50 by 2022, primarily due to financial delisting [para. 17]. In 2023, specific sectors like real estate saw significant delistings due to stock prices falling below face value, a trend expected to continue in 2024 [para. 18].

Companies often attempt to avoid delisting through stock buybacks, major shareholder increases, or restructuring. Guanghui Auto's stock price, for example, remains below 1 yuan despite such efforts [para. 19][para. 20]. Judicial restructuring has become popular but often fails to prevent delisting due to prolonged processes and snags like debt evasion [para. 21][para. 22].

There are arguments for revising the delisting rules to provide companies with more self-rescue opportunities. For example, the Nasdaq grants a 180-day rectification period and allows reverse stock splits. Yet, similar measures may be ineffective or lead to deliberate avoidance of delisting in the A-share market [para. 23][para. 24].

Attempts to circumvent delisting through reverse stock splits have faced criticism and ineffectiveness due to market maturity differences [para. 25]. Regulatory bodies need to balance maintaining market integrity and providing companies with reasonable recovery chances [para. 26]. For broader, smoother market exits, enhanced voluntary delisting mechanisms, similar to those in the U.S., are proposed to create a dual approach to delisting: rigorous mandatory standards alongside facilitated voluntary exits through mergers and acquisitions [para. 27].

In conclusion, enhancing the adaptability and stability of delisting rules while improving investor protection are crucial areas for regulators to address, ensuring the A-shares market remains both fair and efficient [para. 28][para. 29].