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China allows firms to escape delisting crosshairs

SHANGHAI: As China's companies continue to rack up losses for the 1999 reporting season, officials have at hand a powerful regulatory weapon to help improve the quality of listed firms.

Under nascent securities laws, Beijing will strip companies of their listings if they post three straight years of losses.

Analysts say delistings would do wonders for China's floundering stock markets, which tend to be driven by speculation and rumours about government policy initiatives.

But China has yet to delist a single company, fearing the move will spark angry protests by investors and send shock waves through its fragile financial system.

Financial stability will probably win out as the government chooses less harsh measures, such as restructuring, over enforcing the punitive timetable, analysts said.

"Delisting? We haven't thought of it," the China Securities newspaper said in a recent headline, reflecting popular opinion that the government would dodge the delisting issue.

That coddling, analysts say, is likely to further undermine investor confidence that regulators will enforce the rules and help improve the quality of listed firms.

"Delisting would be an effective market tool leading to sound company management, market transparency and, of course, to cool investor speculation," said a broker at a foreign securities firm.

Prices for the stock of loss-making companies often surge as investors speculate the government will come to their rescue by restructuring them.

The China Securities Regulatory Commission (CSRC) has pledged to toughen up on delistings this year, but analysts say the market watchdog is all bark and no bite.

"What the government usually does is save those companies with asset restructuring," said a broker at CITIC Securities.

Early this year, Chinese officials gave signs they were finally taking a serious look at the issue, about six years after the law was written.

Shortly before stepping down as chairman of the CSRC last month, Zhou Zhengqing made the study of "delisting mechanisms" one of the top 10 priorities for 2000.

China's Company Law already stipulates listed companies with three straight years of losses should be suspended from trading, or declared "PT" - particular transfer - under which they can only trade on Fridays.

China will eventually delist firms if they make no turnaround within an unspecified "grace period", the law says.

If the law were enforced today, it would immediately affect three companies deep in the red and cause jitters for more than 50 other firms - including both hard currency B shares and domestic A shares - in danger after losses in 1997 and 1998.

And with the 1999 reporting season in full swing, many other firms with losses in 1998 and last year would be in danger.

"It is really hard to go ahead with delisting very soon because the government has many issues to be concerned about," said a manager of a major mutual fund. "To minimise angry reactions from retail investors is probably the top one."

Shanghai Narcissus Electric Appliances Co has said it expects to see its trading curbed sharply - but not lose its listing - after three straight years of losses.

"We are very likely to be under PT, but so far we have not been notified of the delisting issue by the market regulator," a company spokesman said.

China has proceeded cautiously with the shutdown of financial institutions over fears angry investors could take to the streets to demand compensation from the government.

Delistings could spark a similar outcry.

Last year, the government stepped in to defuse a furore over scandal-scarred Hainan Minyuan Modern Agriculture Development Co, arranging a takeover of the firm, whose stock had been suspended from trading for more than two years.

The trading suspension had drawn petitions, protests, and even threats of suicide from furious stockholders with fortunes tied up in the once high-flying counter.

The CSRC has tried to clean up China's freewheeling stock markets since becoming the sole regulatory authority last year, but government worries over the impact of delistings would take precedence for now, analysts said.

Shenzhen-listed B share conglomerate Zhonghao Group Co, which has racked up three years of poor earnings, said reluctance of the part of regulators will buy it some time.

"We are ready to be put under PT," said a company official. "But I don't expect any delistings until the middle of next year."-Reuters