Caixin Weekly | New Challenges in Face Value Delisting (AI Translation)

财新周刊｜面值退市新考验

The article, authored by Wang Juanjuan from Caixin Weekly, discusses the ongoing delisting reform in China’s A-share stock market, emphasizing the increased enforcement and controversy surrounding the removal of "zombie companies" and poor-performing firms.

The reform, initiated in 2021, has seen accelerated delistings, especially in 2024, with 45 companies delisted so far, matching the total number for the entire year of 2023. These delistings outpaced the number of companies listed in the first half of the year, primarily driven by the "face-value delisting clause," where stock prices fall below 1 yuan for 20 consecutive days due to insufficient market inflows and a general market downturn [para. 2][para. 4]. Specifically, 24 companies have been delisted and moved to the New Third Board, while 21 are in the process of delisting [para. 1][para. 2].

A major point of contention is whether delisting due to face value is fair. Some market participants argue for a more lenient approach similar to the U.S. market, which includes reverse stock splits and remediation periods, while others see these delistings as necessary to eliminate poor-quality stocks [para. 3]. The challenges in enforcing delisting often involve significant stakeholders like major shareholders and local governments. Suggestions for regulatory policy improvements include incorporating review mechanisms to adjust quantitative indicators timely while maintaining the integrity of market competition and risk constraints [para. 4][para. 5].

Despite the reforms, a diversified delisting path has not fully developed. Wang Xiao from IDG Capital emphasizes the necessity of distinguishing between mandatory delisting for severe issues and voluntary delisting through mergers and acquisitions, aligning more with U.S. practices where acquisitions are a primary reason for delisting [para. 5][para. 7].

In April 2024, the China Securities Regulatory Commission (CSRC) released new "Opinions" to tighten delisting standards while aiming to enhance diversified delisting channels and improve policies on mergers and acquisitions. This move includes a policy transition period, so the new rules have not yet fully been implemented [para. 6][para. 7]. The article highlights the problems with speculative trading in small and poorly performing stocks, which continue despite regulatory crackdowns [para. 6][para. 17].

A significant case discussed is Guanghui Automotive, a major automotive dealer not facing immediate operational risks but whose stock price has fallen significantly, approaching delisting thresholds. This demonstrates market pessimism rather than inherent business failure [para. 21][para. 22]. Similar trends are observed in other companies struggling with delisting risks due to face-value criteria, even though they might not be fundamentally unsound [para. 23][para. 26][para. 27].

Efforts to prevent delisting include stock buybacks and restructuring, though these measures often face practical challenges. For instance, pending judicial restructuring has saved some companies but failed for others due to procedural delays [para. 28][para. 30][para. 31]. Analysis points out that stock consolidation and capital reduction could be beneficial, drawing from U.S. market practices. However, these measures should be tightly regulated to prevent speculative trading and ensure genuine market recovery [para. 33][para. 34][para. 38].

The delisting issue is rooted in broader structural challenges, including the vested interests of local governments and the symbolic importance of listed companies in regional economies. Local governments are reluctant to lose listed companies, complicating the enforcement of delisting rules [para. 41][para. 42]. The article suggests that lessons from the U.S. Fair Fund system and other international practices could improve investor protection and compensation in China [para. 48][para. 49].

The reform aims for a more balanced approach to delisting, combining strict enforcement with support for voluntary market exits, akin to international markets. The CSRC continues to seek improvements in these regulations while focusing on investor protection during the delisting process [para. 55][para. 56]. The discussion underscores the need for effective regulatory measures that protect investors while ensuring market integrity and efficiency [para. 57][para. 59].