Photographer: Johannes Eisele/AFP via Getty Images

China’s First Small-Cap Stock Delisting Spurs Speculative Frenzy

  • Xintai had record volume July 27 after CSRC ordered expulsion
  • Trading tests regulators’ commitment to improving standards

There’s a new type of speculation on Shenzhen’s ChiNext board.

Dandong Xintai Electric Co. is being delisted for fraud in its initial public offering, the securities regulator said July 8, marking the first expulsion for a stock on China’s venue for small-cap growth companies. While Xintai’s down 80 percent since then, its slide was punctuated by a 10 percent surge on July 27, when volume was the highest on record. Retail investors accounted for 95 percent of buying that day, according to the Shenzhen exchange, which warned buyers they risk losing money.

Traders are testing the commitment of China’s watchdogs to improving listing standards and reducing risk in the financial system, even when their actions impose losses on the individual investors who dominate the $6.1 trillion market. Xintai was worth 5.2 billion yuan ($783 million) at its peak in June 2015 before a market-wide boom gave way to a rout. The China Securities Regulatory Commission and the Shenzhen exchange have said at least five times that the delisting process will be irreversible.

“The regulator looks determined to push through Xintai’s delisting and enhance market rules,” said Zhang Haidong, chief strategist at Jinkuang Investment Management in Shanghai. “There are too many gamblers in this market who ignore all risks.”

Investors may have drawn comfort from the fact that a unit of China’s sovereign wealth fund was also a Xintai shareholder. The company’s filings show that Central Huijin Investment Ltd. acquired 1.37 million shares in the third quarter of last year and was among its top 10 free-float holders at the end of March.

Industrial Securities Co., which arranged Xintai’s IPO in 2014, said in June it will start a fund with 550 million yuan of its own money to repay investors. Those who bought Xintai shares after the IPO prospectus was published and before the fraud was exposed will qualify, it said. In a separate June filing, the Fuzhou-based brokerage said it was being investigated by the CSRC for a suspected failure to perform its statutory duties. The investigation came after Xintai was fined 8.32 million yuan by the CSRC the same month for fabricating financial information in its IPO application.

Field Day

Traders continue to be drawn to the company despite declines this week. Turnover in the stock jumped to 155 million yuan on Tuesday, topping that of PetroChina Co., which has the biggest weighting on the nation’s benchmark index. While the shares tumbled 32 percent this week through Thursday, they climbed 0.7 percent at Friday’s close. The ChiNext dropped 1 percent.

“Speculators are having a field day with Xintai,” said Chen Jiahe, a strategist at Cinda Securities Ltd. “These guys are not going away despite regulatory tightening.”

Delistings in China are rare. A total of 78 companies were expelled or pulled their listing from China’s two main stock exchanges from 1993 through May 2014, the CSRC said in a statement that month. By comparison, more than 10,000 companies were delisted from Nasdaq and the New York Stock Exchange from 1995 to 2012, according to the same statement.

Xintai will be suspended at the end of a 30-trading day period that started on July 12 and the bourse will make its final decision on the expulsion within 12 months, the Shenzhen exchange said in a statement last month. The CSRC did not immediately respond to faxed questions. Niu Yue, a spokeswoman for Xintai, did not immediately respond to a phone call and an e-mail seeking comment.

Over-the-Counter

While neither the regulator nor the bourse operator spelled out whether investors will be allowed to buy and sell Xintai shares elsewhere, Zhuhai Boyuan Investment Co. -- which was delisted earlier in the year -- has said it plans to trade on the nation’s over-the-counter market, according to a May 11 filing.

A total of 8,086 small companies are listed on the National Equities Exchange and Quotations, also known as the third board, according to NEEQ’s website. Zhuhai Boyuan, a venture capital company, was removed in May after being investigated by the CSRC for forgery and disclosure violations.

Lei Xianrong, a 34-year old investor based in Shanghai, says that without the CSRC’s repeated warnings, even more people would have jumped into Xintai.

“People are willing to play as they don’t think they’ll be left holding the hot potato,” said Lei, who has about 400,000 yuan invested in equities. “I’m not interested in buying such stocks, it’s just too risky.”

— With assistance by Amanda Wang, and Fox Hu

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE