China's exchange gets tough

The move is set to boost the credibility of China's stock market

By Duncan Hewitt in Shanghai

In a move being seen as a major breakthrough for the development of stock markets in China, the country's market regulator has for the first time removed a loss-making company from the stock exchange.

The de-listed firm, a manufacturer of washing machines, had made losses for four years in succession.

Previously, loss-making firms have been bailed out by the government.

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Analysts said the move was an important step towards increasing confidence in China's markets, particularly among foreign investors, ahead of entry into the World Trade Organisation.

But it could be a shock for China's stock holding masses.

The first-ever de-listing in the 10-year history of China's stock market is being hailed as an attempt to boost the market's credibility.

Analysts say that in the past the government has bailed out failing companies because of concern about upsetting the millions of ordinary citizens who have invested in China's stock market.

Also almost all listed firms are former state-run enterprises which the authorities want to prop up.

Out of time

But the government recently said it was serious about de-listing companies which had made losses for more than three years, and for the Shanghai Narcissus Electric Appliance Company, time has finally run out.

The former state-owned washing machine maker was denied another chance to clean up its act after reporting its fourth year of losses.

Observers say the move sends a warning both to poorly performing firms and to investors.

It may eventually end the phenomenon of companies on the verge of bankruptcy seeing their share values soar as investors speculate on a bail-out by the government.

Allegations of protectionism

But the new rules are likely to be applied cautiously at first; two other loss-making firms have been given six months to turn their fortunes around and people with shares in de-listed firms may still try to sell them through designated brokerages.

Still, the move is being seen as a sign that China wants to clean up markets which have been plagued by allegations of protectionism, insider trading and price manipulation.

China's hoped-for entry into the World Trade Organisation may add to the pressure, and earlier this year Beijing appointed a former Hong Kong market regulator as deputy head of its regulatory commission.

She has already warned listed firms that they will have to improve their management.