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Christine Chan

China's stock exchanges have issued the most severe warning so far to investors that another dozen companies may be delisted because of poor performance.

The Shanghai and Shenzhen exchanges sounded alarm bells to investors about the potential risk of investing in companies with 'particular transfer' status - a category reserved for those posting three consecutive years of losses.

The warning is the clearest indication yet that 12 companies - those with the worst profit records - will be thrown out of the exchanges for their poor performance.

So far only one company - electrical goods maker Shanghai Narcissus Electric Appliances  - has been selected for delisting.

A total of nine firms had yet to apply for an extension of their grace periods, during which they were supposed to formulate plans to return to profitability, said the exchanges.

Another three companies that had applied for grace periods had yet to have them granted, they said.

'These nine companies will have their listing status removed should they not apply for extensions within 45 days of their trading suspension,' state media said yesterday.

Delisting is controversial because it means investors may find it more difficult to trade their shares, and so lose money.

However, foreign observers have called on Beijing to stop protecting poor performers.

The warnings are seen as the latest move in the campaign by securities regulators against the weakest of the 1,100 listed companies in a bid to improve the overall quality and corporate governance of the mainland counters.

The problems they face include a lack of transparency, bad disclosure and poor accounting standards. These issues are one of the reasons Beijing appointed Laura Cha Shih May-lun, former deputy chairman of Hong Kong's Securities and Futures Commission, to mainland securities regulator the China Securities Regulatory Commission.

In April, loss-making Shanghai Narcissus Electric Appliances became the first company to be delisted from a mainland stock exchange.

The maker of home appliances, which at its peak had 13 per cent of the domestic washing-machine market, became the first listed mainland company to report four consecutive years of losses after announcing a deficit of 145.7 million yuan (about HK$136.5 million) for last year.

Delisting of companies has sparked a fierce debate in China. Until recently, China had not delisted any companies on the Shanghai or Shenzhen stock exchanges. They were worried that doing this would anger shareholders who would lose their investments.

The government is trying to lure mainland investors to the capital markets to help provide funds to enable ailing state businesses to restructure.

Beijing has been worried that investors might not be so willing to invest their money if state firms tried to sell shares to the public in the future.

Market regulators have already issued their first guidelines for putting chronic money-losers on the chopping block.

The China Securities Regulatory Commission in February said firms which posted losses for three years or more would be delisted if they failed to return to profit within six months to a year.

The loss-makers would need to apply for the grace period within 45 days after dealing in their shares was suspended following an announcement of a third consecutive year of losses, and present a viable restructuring plan, or face delisting.

Graphic: 12comgbz



China stock exchanges get tough with hit list for companies reporting three consecutive years of losses