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Asian Stocks Recover, Small-Caps Up After Clarification on New Rules

CSRC clarifies new rules targeting "zombie" firms, not all small-caps, with only 30 companies at delisting risk next year.

By Athena Xu

4/17, 00:21 EDT

Key Takeaway

  • CSRC clarifies new stock rules aim at "zombie" firms, not all small-caps, after the CSI 2000 Index fell 11%.
  • New regulations include stricter listing criteria and enhanced market supervision to improve quality and integrity.
  • Only about 30 companies face delisting risk next year under new rules; measures target firms valued below 500 million yuan.

Regulatory Reassurance

Following a significant downturn in small-cap shares, the China Securities Regulatory Commission (CSRC) has made efforts to clarify the intentions behind the newly introduced stock exchange rules. Guo Ruiming, a director at the CSRC, emphasized that the regulatory amendments target "zombie" companies and "bad actors" within the market, rather than small-cap companies as a whole. This clarification was necessary after the CSI 2000 Index, which tracks small-cap companies, experienced an 11% drop over two consecutive days, reflecting investor concerns over the potential for increased delistings under the new framework.

Market Reaction and Regulatory Goals

The announcement from China's State Council regarding tighter stock listing criteria and enhanced market supervision led to significant market volatility, particularly among small-cap stocks. The CSI 2000 Index's sharp decline was a direct response to fears that the new rules would lead to a wave of delistings. However, the CSRC's reassurances aim to mitigate these concerns by highlighting the targeted nature of the regulatory changes. The measures introduced by the State Council, which include stricter listing criteria, a crackdown on illegal share sales, and improved supervision of dividend payouts, are designed to improve the overall quality and integrity of the market.

Delisting Thresholds and Expectations

To further alleviate market anxieties, the CSRC provided concrete estimates regarding the potential impact of the new rules on delistings. According to their calculations, only about 30 companies are at risk of being delisted next year based on their financial metrics. An additional 100 firms could be designated with a "special treatment" warning, indicating potential delisting risks, but these companies will be given more than 18 months to improve their performance. The new regulatory framework also introduces a market value threshold for delisting, targeting companies valued at less than 500 million yuan for removal from the Shanghai and Shenzhen exchanges. Presently, only four firms fall below this threshold.