First case of delisting of a state owned enterprise in China

Written by Victor Fan || April 18 2014

On April 14, 2014, Shanghai Stock Exchange-traded *ST Changyou was delisted, becoming the first state owned company to be delisted in A-share markets.

Continuous Losses

The reason for the delisting of this company was losses for three continuous years, from 2010 to 2012. As the first step, *ST Changyou’s trading has been suspended from May 14, 2013. After 11 months, the company still was not able to revert to profitability. The 2013 annual report showed that the company had a net profit of RMB-5.922bn and the net assets were about RMB-2.097bn. The market welcomed news as this is the first case of a large central-government-owned enterprise to be delisted and at the same time, the first delisted company since the release of new delisting regulations.

Is delisting in Chinese capital markets now the norm?

Analysts treat the move as the start of a normalized delisting mechanism, which will be different from the past when it was very unusual for a company to be delisted, especially for a state owned enterprise. For the whole industry in China, the delisting in Chinese capital markets is higly beneficial with both short-term and long-term benefits. While in the long term this is a step towards a better market environment, in the short term we may see a price growth in certain stocks due to investment of the freed cash in other equities. However, such impact will be limited as the number of companies going public is still far larger than the number of delisting companies. Besides, there are still ways for delisted companies to return to the market again in the future such as asset reorganization or becoming profitable.

In the case of *ST Changyou, there are some speculators, who bought the stocks in large volume at the last trading date on May 13, 2013, betting for the asset reorganization of the company. However, they failed since *ST Changyou was actually delisted. It is a good lesson for such speculators, reminding them that investing in stock market contains risk. In the future, speculators will have less chance to make riskless money through betting on the asset reorganization. Interestingly, some of these speculators belong to interest groups in China, who are thought to be the resistance power against delisting of firms.

Overall, application of delisting mechanism is one important aspect of the marketization reform of the Chinese stock market. Another important reform measure is the updated IPO registration mechanism, which transfers power to judge the stock quality of a stock from CSRC to the market. The reform have already entered the deep water area and which will inevitably shake up the existing interest groups, therefore the war between proponents and opponents of the reform will continue.  

FYI, these are the terms for special treatment and delisting mechanism in Chinese stock market:

  • *ST –Continuous 3 years losses for a listed company; delisting alert
  • ST – Continuous 2 years losses for a listed company; ST here stands for special treatment
  • S*ST – Continuous 3 years losses for a listed company; delisting alert + not completed the share reform yet
  • SST – Continuous 2 years losses for a listed company; special treatment + not completed the share reform yet
  • S – Not completed the share reform yet