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For PT firms the bell tolls
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Yang Yunfei
WHEN Qian Hui ploughed money into Shanghai listed Zhengzhou Baiwen Co Ltd's shares last year, She knew quite well that she was buying into one of the country's most dismally performing companies that was most likely to be the first firm delisted from China's decade-old stock exchanges.
“Delisting? Impossible! There has never been such a thing in China's stock market yet,”she said, hoping to cash in on rumours that the heavily indebted retailer would be rescued in some form of government-backed bailouts.
But it has turned out to be a very poor bet for Qian as she still had to give up half her shares to Baiwen's rescuer, Shandong retailer Sanlian Group, had a takeover plan been approved by market regulators. And the worst has yet to come as market regulators have pressed ahead with kicking some of the worst performers out of the Shanghai and Shenzhen bourses this year, with Zhengzhou Baiwen one of the most likely candidates.
Delisting urged
Delisting some loss-making firms, as many analysts believe, indeed is only part of China's sweeping efforts to bring China's unruly financial markets up to international standards and prepare its fledgling securities sector to stand up to the looming global competition that WTO membership is expected to bring.
Under China's nascent Securities Law, the China Securities Regulatory Commission (CSRC) has the power to delist a company that posts three consecutive years of losses.
But the CSRC, which has talked tough before on delisting chronic money losers, has so far never taken the drastic step to throw a single company out of the exchanges despite having about a dozen candidates. Many analysts say that the market watchdog is all bark and no bite.
Market regulators have never gone so far as to kick some loss-making firms out of the bourses, critics say, partly because guidelines allowing them to do so were murky until now.
Murkiness in regulations goes beyond the issue of delisting as some local governments where troubled firms are located have resisted.
A delisting, as many believe, would unnerve investors and cause public unrest.
Some two years ago, local governments 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.
More importantly, China needs robust equity markets to raise capital for its money-hungry State-owned enterprises. Many have feared that delisting chronic money losers might dampen investors' sentiments, upend their confidence in listed companies, hinder China's ambitious plan to raise money to aid State-sector reform by listing State-owned enterprises.
While deadbeat firms like Zhengzhou Baiwen crowd the nation's bourses, some better companies seeking a spot on the exchanges are not given a fair chance to get listed, said Tang Wanming at United Securities.
“Expelling some moribund firms can make way for profitable companies that seek access to equity capital,” Tang said.
Delisting would affect some of the most volatile and speculative counters in the Shanghai and Shenzhen bourses — roughly 50 companies labelled special treatment (ST) for racking up two years of losses and nine firms called particular transfer (PT) for posting losses for three years.
These ST and PT firms have tested market regulators' patience long enough as repeated government calls to buck up have gone unheeded.
These troubled companies are often rumoured to be candidates for government-backed asset swaps or bailouts.
Speculators often bid up their shares to disproportionate highs not in line with corporate performance on a gamble the local governments will swap, sell or inject assets in a bid to save the poor performers and a corporate revamp can eventually turn the money loser around.
The result last year was some of the most stunning share surges belonged to the poorest quality companies.
Last year, five of the top 10 best performing B shares belonged to companies with the ugliest balance sheets.
Shanghai Rubber Belt, which made a meager 1.22 million yuan (US$146,400) in profits in the first half of last year, soared 462 per cent to top last year's B share performer list due to frequent restructuring rumours.
Ironically, firms with the strongest corporate fundamentals lag the market.
Dazhong Transportation ranked 47th out of the 55 stocks on the Shanghai B-share index. Dazhong saw its taxi fleet triple in size in five years and profit double, making it one of the most profitable companies in the Shanghai bourse. The company also boasted the second-highest profit margin on the index in 1999.
The disparity between Dazhong's business excellence and market mediocrity suggests that investors are more interested in speculation than in stock valuation.
In most cases, however, asset restructurings by listed companies are used more as a tool for price manipulation and insider trading than an earnings-driven method for overhauling poorly run corporations.
Manipulators push up stock prices of listed companies and rake in staggering gains ahead of an actual company restructuring announcement, leaving retail investors holding dud shares.
This kind of situation increases market speculation and also distorts investors' thinking, analysts say.
A survey by China Securities News in February showed that 80 per cent of individual investors are in favour of delisting poor quality companies from the domestic stock markets.
“By not allowing poor quality listed companies to go bankrupt and be delisted, the Government is sending the wrong signal to investors about the risks of investing in stocks and creating the illusion that the government will always be there to take care of things,”said Yang Jun at Shenyin Wanguo Securities.
As more and more listed companies continue to rack up losses over the past three years, there have been heated-up calls from investors and economists for loss-making companies to be delisted to improve the quality of listed companies and encourage “rational investment”.
Analysts say that delisting poor quality firms would be an effective market tool leading to sound company management, market transparency and to cool investor speculation.
Delisting can also end the notion that a listed company cannot fail while teaching those gamblers a valuable lesson that they must be responsible for their investments.
Zhengzhou Baiwen has become a test case for the government's attitude toward delisting. The retailer, under a whopping 2.5 billion yuan debt, came under heavy media attack last year when Xinhua disclosed that it had used falsified data to obtain a listing and afterwards cooked its books to hide losses.
State media also accused the troubled firm of mismanagement and blasted a plan to restructure it by Shangdong retailer Sanlian Group as not “up to standard” and an “abnormal phenomenon”.
Some reports called for Baiwen, which reported its third year of losses on March 21, to be the first firm delisted from the Shanghai Stock Exchange, a dramatic move that analysts say could set an example for other companies to improve their corporate responsibilities and performance and thus spell a healthier market.
“The market cannot wait forever for the loss-making firms to turn a profit,” said analyst Zhou Dao at Southwest Securities.
“The government has to face the problem and come up with a clear solution.”
Premier Zhu Rongji threw his weight behind the long-awaited reforms of the country's unruly stock markets in January by vowing that poor companies should be allowed to fail and kicked out of the bourses.
“Companies that should be closed must be closed resolutely and those that should be delisted must be delisted without any mercy,” the premier was quoted by media as saying.
Analysts say that delisting poor quality firms follows a common practice adopted by world's fully developed stock markets.
The technology-heavy Nasdaq, for example, chopped some 170 companies during the first 10 months of 2000.
Nasdaq delists a company when its share price falls below either US$1 or US$5 for 30 consecutive trading days, depending on the Nasdaq criteria the company falls under. The company's shares must trade above the minimum bid price for 10 consecutive days during the next 90 days to return to the Nasdaq and keep its seat in the exchange.
Axe to fall
At last, the message hit home and, hopefully, hard enough for ailing listed firms this time.
The CSRC issued detailed regulations in February regarding delisting procedures, saying firms that post losses for three or more years will be given a six- to 12-month grace period to turn things around or face delisting.
Market regulators went further to announce a concrete delisting framework on March 22, threatening to delist firms which fail to deliver a workable turnaround plan after forecasting their fourth or more year losses for 2000.
Turnaround plans are required to be filed with the stock exchanges by April 30 for assessment, and the CSRC would take action “in time”. The CSRC also said that it would not grant a grace period to applicants that did not propose a feasible turnaround plan. The watchdog also warned PT companies not to attempt “fake asset restructurings designed to escape from delisting.”
The announcement, appearing to move the delisting timetable ahead significantly, might sound the death knell for six PT firms, which have already forecasted further losses for 2000. These firms would be on the chopping block first.
Most PT firms said early this month that they were speeding up asset or debt restructurings in a bid to return to profit to escape delisting.
But five firms issued separate warnings on Thursday that they could possibly be delisted because of doubts over proposed restructurings.
Tu Guangshao, CSRC secretary-general, warned on March 20 that China would carry out its first delisting before June.
“I can say that before June this year, you will see a delisting,”Mr Tu reportedly said.
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