New guideline on social credit lifts A shares

Mavens see reforms and transparency protecting small investors' interests

Market mavens said on Wednesday that China's A-share investors had welcomed Tuesday's guideline from the country's leadership to improve the social credit system in order to make the overall capital market healthy and facilitate high-quality economic development.

The benchmark Shanghai Composite Index gained almost 2 percent on Wednesday while the Shenzhen Component Index rose more than 3 percent and the ChiNext jumped more than 4 percent.

The general offices of the Central Committee of the Communist Party of China and the State Council, China's Cabinet, jointly released a guideline on Tuesday underpinning the development of the social credit system.

Credibility and the rule of law should be further strengthened in the capital market, the guideline stated.

The delisting mechanism should be strictly implemented to eliminate unfitting companies, better facilitate the development of quality companies and protect investors' interests, it said.

Greater importance has been attached to delisting and information disclosure over the past few years in China.

The Shanghai and Shenzhen stock exchanges released new delisting rules on Dec 31, 2020, which took effect on the same day.

Taking the delisting mechanism of the technology-focused STAR Market and the ChiNext in Shenzhen as reference points, a similar delisting process has been implemented on the main board and the National Equities Exchange and Quotations, indicating a complete implementation of delisting rules in the A-share market.

The process of forced delistings due to major violations of laws has been optimized under the new delisting rules.

Xinjiang Yilu Wanyuan Industrial Investment Holdings has become the first A-share company to undergo a forced delisting this year. According to the Shanghai bourse, the company cooked up higher sales revenue figures for two consecutive fiscal years (2018 and 2019), thus breaching the new delisting rules.

The run-up to Yilu Wanyuan's delisting started on Wednesday and will last for 15 trading days. Trading in the company's shares during this delisting run-up will be done with a "special treatment "tag attached to its code. The last day for trading in its shares before they are delisted is estimated to be April 21.

Dong Dengxin, director of the Finance and Securities Institute, which is part of the Wuhan University of Science and Technology, said the fundamental idea behind the delisting rules is the same as that of the registration-based IPO mechanism. It is in line with legal ways and market-driven forces to eliminate "zombie companies" and improve the overall quality of listed companies.

The market will also become more inclusive and open when the ecosystem turns healthier by allowing new entrants and filtering out disqualified companies, he said.

Tuesday's guideline also stressed that market entities should be more serious about information disclosure to further improve market transparency.

He Nanye, a researcher from the Suning Institute of Finance, said complete information disclosure is the foundation of registration-based IPO mechanism. To prepare for the overall adoption of the mechanism, corporate governance should be further improved, with the controlling shareholder (s), or the actual controlling persons, chairman and the supervisor concerned fulfilling their due responsibilities.

Not only should market transparency and information quality be guaranteed but full information disclosure should be made the prerequisite for less administrative intervention and a bigger role for the market, he said.