New rules boost global standing of A shares

International investors' trust in Chinese equities has been enhanced after tougher regulations took effect to weed out listed companies indulging in misconduct or with weak fundamentals, experts said.

"We welcome the new set of rules as it has raised costs of misreporting or committing financial fraud and will therefore improve corporate governance in the A-share market," said Lynda Zhou, chief investment officer for equities in China at Fidelity International, a global asset manager.

"This will help more A-share listed firms become qualified to be part of the investment universe of foreign investors," Zhou said.

The risk of forced delisting has increased considerably due to the new rules, serving as an effective deterrent to potential misconduct of listed companies, she said.

The new delisting regulations were released by the Shanghai and Shenzhen stock exchanges on Dec 31 and have since taken effect across the whole A-share market. The rules have shortened the delisting process and tightened the delisting criteria for financial indicators, trading, noncompliance and violation.

For instance, after the revisions, listed companies will be forced to delist if they indulge in misreporting for two consecutive years and the total fabricated revenue exceeds 500 million yuan ($77.4 million) and half of the total disclosed revenue for the period.

Companies that are seriously defective in information disclosure or in compliance and fail to rectify the flaws will also be delisted due to the new rules, in a bid to improve the governance and quality of listed companies.

The revised rules will also look to eliminate firms with limited operational abilities from the market by refining the financial-indicator delisting criteria and adding a delisting threshold based on market value.

Companies will be forced to delist if their closing market value falls below 300 million yuan for 20 consecutive trading days. Share prices of the more than 30 A-share companies with closing market value of less than 1 billion yuan as of Dec 31, which are liable to delisting under the new rules, dropped by an average 7.2 percent in the first four trading days of 2021, according to market tracker Wind Info.

"The latest rules are in keeping with China's multiyear market reforms that help buffer investors' confidence in the quality of onshore listed assets," said Han Tan, a market analyst at FXTM, a United Kingdom-based global trading platform.

Chinese equities will benefit further as more of these market reforms take hold, especially as many global investors are looking to ride on China's "stellar" economic recovery from the COVID-19 outbreak, he said.

China has made improving its delisting system one of its key financial reform tasks during the 14th Five-Year Plan period (2021-25).

Related efforts have been stepped up since 2019, with reformed delisting rules trialed on Shanghai's STAR Market and Shenzhen's ChiNext. The new delisting rules effective across the whole market came in after the two bourses solicited public opinion on draft revisions earlier in December.

From 2019 to 2020, 26 listed companies were forced to delist from the two bourses, more than double the number seen in the previous six years, said the China Securities Regulatory Commission, the top securities regulator.

The regulator will work to further strengthen delisting rules while improving the related investor protection mechanism, it said, aiming to crack down on companies that violate rules and minimize investors' losses.