State firm's delisting raises fairness question

As the closing bell rang in the Shanghai Stock Exchange on Wednesday, China's equity market witnessed the first delisting since reform of the delisting rules in 2012.

The removal of Nanjing Tanker Corp. under the state-owned China Changjiang National Shipping (Group) Corp. from the bourse came after it posted losses for four consecutive years. It is the first delisting ever of a state firm.

Share price of Nanjing Tanker closed flat at a junk price of 0.83 yuan (about 13 U.S. cents) before it will be officially delisted on Thursday.

But controversies about the company and the country's delisting rules still linger.

Although delisting is common in the U.S. and other equity markets, it is quite rare in China, where majority shareholders and local governments decide whether a company should be pulled from the market.

About 4,500 U.S. companies have been delisted from the New York Stock Exchange since 1962, but only 78 Chinese companies have been ousted from Shanghai and Shenzhen stock exchanges since 2001 when China introduced the delisting rules, according to a study by Pi Haizhou, an independent financial commentator. That is almost 90 each year in the States as opposed to six or so each year in China.

"The delisting system of China's A-share markets is flawed," Pi wrote in his blog, saying the Nanjing Tanker's delisting deserves no applause as a market clean-up.

Under current rules, delisting focuses on financial reports -- those that make losses for three consecutive years face suspension. Stocks may be delisted if trading volume is too low or the share price falls below one yuan.

Xiao Gang, chairman of the China Securities Regulatory Commission, (CSRC), said in January that the legal basis for delisting in cases such as "major violations" needs clarification. Delisting will become a regular occurrence and a market mechanism like the CSRC needs better delisting rules.

Half of recent delistings in China were voluntary, and part of strategic restructuring or privatization, while the other half were compulsory due to financial reports.

The Nanjing Tanker's delisting still infuriated some in the market, not because it was treated unfairly, but because some other companies involved in financial fraud have avoided delisting. For example, shares of the Nanjing Textile Import & Export Co., Ltd., are still traded, even though the company falsely reported increases in profits totaling 340 million yuan for five straight years.

Another two companies, Green Land Biological Technology Co., Ltd. and Wanfu Biotechnology Agricultural Development Co., Ltd. have stayed on the market despite having been found to have cheated in their financial statements over the last two years.

"If fraudulent companies are not delisted but those firms with losses must be removed from the market, the delisting system is defective and totally upside down," Pi said.

Deng Ge, a CSRC spokesman, said the delisting requirement does not fit Nanjing Textile Import & Export, as the company made profits for two consecutive years after it was found to have faked profits in the previous five years.

"For the sake of protecting medium and small investors, we won't force the company to be delisted for the time being," Deng said.