China's Reverse-Merger Candidates Plunge on Regulatory Scrutiny

  • CSRC says it's conducting in-depth analysis on market impact
  • Bloomberg-compiled index of stocks extends losses to 12%

Chinese companies seen as candidates for reverse mergers plunged for a second day after the nation’s securities regulator signaled that the trend of delisting in the U.S. to sell shares in the mainland at higher valuations would come under greater scrutiny.

The China Securities Regulatory Commission said on Friday it’s conducting “in-depth” analysis of how companies returning to Chinese exchanges via initial public offerings or mergers and acquisitions would impact the stock market. In a March report, Haitong Securities Co. listed small capitalization and low return-on-equity and debt as among the key criteria for selecting a shell company. A Bloomberg-compiled index of 25 companies based on this criteria fell 6.4 percent at 2 p.m. in Shanghai, bringing a two-day loss to 12 percent.

“Regulatory authorities are not pleased that the A-share market is becoming a dumping ground,” said Francis Lun, chief executive officer of Geo Securities Ltd. in Hong Kong. “People who want higher valuation of A shares will end up with rubbish from around the world. If they are tightening it means it will be very difficult to buy shell companies in the A share market."

Concern that regulators may crack down on relistings, along with disappointing trade data, dragged down the broader stock market, with the Shanghai Composite Index plunging 2.5 percent for a two-day loss of 5.4 percent, the most since late-February.

ADRs Plunge

U.S.-traded Chinese companies that have already announced plans to return home tumbled Friday in New York after the CSRC briefing. Speculation of shell companies for back-door listings requires attention, spokesman Zhang Xiaojun said in Beijing. Zhang was responding to rumors that circulated the previous day in social media that the CSRC may suspend backdoor listings of Chinese companies traded overseas.

Momo Inc., the Chinese dating app company, fell as much as 8.1 percent in New York on Friday, the most since March 15. YY Inc. slid as much as 8.9 percent, the most since August.

The potential shell companies in the Bloomberg index have a market value below 3.5 billion yuan ($540 million), a return on equity of less than 5 percent and a debt-to-assets ratio under 30 percent. They exclude halted shares and those listed on the ChiNext board, where backdoor listings are not allowed.

Shanghai Sanmao Enterprise (Group) Co., a maker of woolen fabrics, has plunged 18 percent in the past two days in Shanghai, while mining company Qinghai Jinrui Mineral Development Co. has tumbled 15 percent. Seven potential shell companies named by China International Capital Corp. in an April research note have fallen on average 9.8 percent in the last two trading days. Shijiazhuang Dongfang Energy Co. is the worst performer with a two-day loss of 12 percent.

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