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China delists company for first time for breaching disclosure rules

[SHANGHAI] The Shanghai Stock Exchange said on Monday that it had for the first time de-listed a company for violating disclosure rules, as Beijing moves to restore the battered reputation of its stock markets.

In a statement on its website the exchange said that Zhuhai Boyuan Investment had broken the rules on important matters of information disclosure.

Boyuan's violation was "very grave", the SSE said in the statement, alleging that the company had misused capital, forged commercial bills and inflated deposits and shareholder equity. "Removing law-breaking companies from the securities market ... can better protect investor interest and can promote steady and healthy development of the capital markets," the statement said.

Boyuan, whose shares have halted trade since May 28, 2015, said in a separate statement that its last trading day was expected to be on May 11.

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The company, which Reuters data shows is engaged in motor vehicle sales and mineral trading based out of Zhuhai in Guangdong province, did not answer calls seeking comment. "This is very positive because it shows the government is actively guiding the market towards rational investment by eliminating bad and misbehaving companies," said Yang Hai, an analyst at Kaiyuan Securities Co. "In the past it was very difficult for a company to be delisted, which encouraged a culture of speculation and resulted in misallocation of capital." The lack of a previously strong delisting mechanism, combined with an arduous approval process for new listings, meant that it was difficult to get onto an exchange - but once listed, even more difficult to get knocked off.

Boyuan, for example, has had its shares suspended from trading since May 2015, when the China Securities Regulatory Commission transferred the company's case to the police.

Analysts blamed a lax regulatory system for creating a brisk market in listed shell companies that could be acquired via reverse takeovers, and also for inflating average price-to-earnings ratios in China, despite widespread public concerns that insider trading, dishonest accounting practices and market manipulation were endemic among listed Chinese companies.

New regulations aimed at cleaning out the bourses of inert or underperforming companies came into effect in 2014 but until now the few companies that have delisted have done so due to business performance issues.

How investors react to the news is an open question.

In the past regulatory crackdowns focused on smaller private companies have seen investors move out of companies seen as lacking government connections into safe government-controlled firms, as occurred in China's bond market when Beijing signalled it would let issuers default in the cause of rationalising yields to better reflect risk.

However, bond investors reacted by moving funds out of private issuers into bonds issued by local government investment vehicles.

Chinese market indexes have crashed since June 2015 after a debt-fuelled rally ran out of steam.

Government efforts to restore faith in the markets have so far failed to gain traction, and previous policy moves were criticised for attempting to use government intervention to force money back into the market.

The Shanghai Composite Index is down over 16 per cent so far this year.

REUTERS

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