China Small Caps Up as CSRC Targets "Zombie" Firms, Eases Fears

CSRC clarifies new rules aim at "zombie" firms, not all small caps, easing delisting fears after an 11% CSI 2000 Index drop.

By Athena Xu

4/16, 22:26 EDT

Key Takeaway

  • CSRC clarifies new stock rules aim at "zombie" firms, not all small caps, easing fears after the CSI 2000 Index dropped 11%.
  • Only ~30 companies face delisting risk under new criteria, with a market value threshold set at less than 500 million yuan.
  • Recent regulatory efforts signal a stronger stance on market integrity, increasing delistings of low-quality firms since 2020.

Regulatory Reassurance

In an effort to stabilize market sentiment following a downturn in small-cap shares, the China Securities Regulatory Commission (CSRC) has stepped forward to clarify the intentions behind the newly introduced stock exchange rules. Guo Ruiming, a director at the CSRC, emphasized in a recent Q&A session that the regulatory amendments are specifically aimed at addressing issues with "zombie" companies and "bad actors" within the market, rather than targeting small-cap companies as a whole. This clarification comes 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.

Historical Context and Future Outlook

The initiative to refine the delisting mechanism is part of a broader effort by China's securities watchdog to enhance market integrity, a process that began in earnest in 2014 with the identification of 27 delisting scenarios. Despite these efforts, the actual number of companies removed from the public market has been relatively low, with fewer than 20 firms delisted between 2014 and 2019 out of the 1,300 that went public during that time. However, the pace of delistings has picked up since the introduction of stricter rules at the end of 2020, signaling a more assertive regulatory stance towards maintaining market quality.