Costliest ST Stock Could Be Delisted

In a significant turn of events for the Chinese stock market, the company formerly known as *ST Zuojiang has announced its impending delisting from the Shenzhen Stock ExchangeThis move marks a notable moment in the ongoing evolution of China’s stock market, signaling that once-thriving companies are facing severe scrutiny and financial realities.

*ST Zuojiang officially disclosed on June 28 that it has received a notice from the Shenzhen securities authority regarding the termination of its stock listingThe company, which has suffered from lackluster financial performance, will face a delisting process beginning July 8, 2024, with final trading expected to wrap up by July 26, 2024. The sequence of events has been punctuated by stark financial losses, where the company reported a staggering net profit loss of 223 million yuan in its latest annual financial report.

In a broader context, this episode illustrates a crucial shift in the Chinese equities market as it embraces a new era of stricter regulations and increased accountability for listed companiesThis decisive action is reflective of a larger trend observed in June when multiple companies, including others with the “ST” designation—often indicative of financial peril—reported similar warnings regarding their potential delisting.

The landscape of the A-share market has dramatically transformed, marking a departure from a prior culture of tolerance for underperforming enterprisesUnder this new regime, companies unable to demonstrate profitability are finding it increasingly difficult to maintain their listingsThis shift has been characterized by a 'strict entry, lenient exit' approach evolving into a paradigm of 'lenient entry, lenient exit.'

Interestingly, statistical analysis reveals a global trend; for example, in the United States, the average lifespan of small and medium enterprises does not exceed seven years, and that of larger corporations merely reaches around 40 years

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In China, these figures are even more disheartening, with smaller companies averaging a life expectancy of a mere three years while large groups linger only slightly longerThese statistics raise pertinent questions about the resilience and adaptability of companies operating within dynamic economic environments.

This also implies an essential economic principle: even the most promising businesses will ultimately face decline over time unless sufficient mechanisms exist to encourage continuous innovation and revitalizationThe current trends in the Chinese market suggest a necessity for ‘creative destruction’—the process by which outdated businesses are replaced by more innovative competitorsThis practice has kept markets vibrant in the United States, where high standards of performance are demanded from publicly traded entities.

Research by Professor Craig Deitch from the University of Toronto echoes this concept, revealing a staggering balance in the U.S. where from 1975 to 2012, the number of companies listed in stock exchanges outstripped the number of companies delisted over the same periodSpecifically, Deitch noted that 17,303 companies exited U.S. markets compared to 15,922 IPOs during this timeframe, emphasizing that the market thrives through the continuous influx of new talent while simultaneously phasing out poor performers.

The situation in China starkly contrasts with the average statistics concerning delisting activityAs of 2021, the Shanghai and Shenzhen stock exchanges boasted over 4,600 listed companies, but the number of delisted enterprises remained a meager 163. This disparity raises alarming flags about market dynamics and the quality of investment opportunities, painting a portrait of a system that incentivizes poor revenue performance rather than accountability.

Statistical reports further unveil the stark differences in performance indicators for publicly listed companies in both markets

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For every company boasting a return on equity (ROE) exceeding 15%, the numbers show a drastic contrast between A-shares and U.S. equities, with only 18 A-share companies meeting this benchmark compared to an impressive 161 firms listed in American exchanges.

Such disparities in performance directly correlate with market behaviorIn the aftermath of the 2008 financial crisis, the U.S. stock market saw a tremendous recovery fueled by proactive corporate governance and robust performance issues, leading to the Dow Jones Industrial Average skyrocketing from 6,470 points to nearly 37,000 points by 2021. In stark contrast, the Shanghai Composite Index has oscillated around the 3,000-point mark throughout this period, despite China experiencing GDP growth of nearly threefold.

The enduring dominance of underperforming companies in the Chinese market results in a systemic issue whereby corporate misconduct is perpetuatedThis poor performance may ultimately lead to a culture that both rewards mediocrity and stifles innovation - a reality detrimental to the long-term health and vitality of China's economic landscape.

In this way, the pattern resembles an academic system where rigid entry standards into the market exist, followed by a lax attitude once admission is grantedThis results in a high-stakes environment whereby companies tirelessly push financial performance to secure an initial public offering, only to be faced with complacency once listed.

Without retirement pressures to encourage continuous adaptation and evolution, many listed firms risk stagnation, transforming over time into entities that merely exist without contributing dynamic proposals or innovations to the market.

In conclusion, a continuous cycle of new entries and exits ensures that the most vibrant companies remain active in the capital market

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