China's vaccine scandal triggers overhaul of delisting rules

Changsheng faces possible delisting. Photo: Imaginechina

The scandal of Chinese pharmaceutical maker Changchun Changsheng Biotechnology, which is found to have systematically falsified test results and produced fake rabies vaccines, has led to retroactive efforts in improving the delisting mechanism.

Just days before the arrest of the 18 executives including Changsheng's chairwoman, the China Securities Regulatory Commission (CSRC) released a document on its website to amend the delisting rules in a drive to purify the stock market.

According to the new rules, a company will be forced to suspend or stop stock trading at a stock exchange in the event of serious rule violations which take a deadly toll on national security and public health.

The new rules stress that the controlling shareholders, actual controllers, board directors and executives of a company which is forced to delist for serious delinquencies must be brought to account.

The new rules also attach importance to the support of media reports, based on which the regulator can take well-founded and effective measures against the problematic listed firms.

The release of the new rules is widely considered as an immediate reaction by the CSRC to Changsheng's wrongdoing, which was exposed by the domestic media in July. Shortly after the media exposure, the State Council, the country's cabinet, sent an investigation group to probe the event, and later found that the vaccine maker used expired materials to produce some rabies vaccines and falsify production and testing records to circumvent regulatory scrutiny.

The scandal has triggered public outrage over Changsheng and damaged public confidence in home-made medical products.

Being the latest case of tainted medical products in China, Changsheng now faces a possible delisting in accordance with the new delisting rules, while the healthcare-related shares have suffered a slump due to the scandal.

In March, the Shanghai and Shenzhen Stock Exchanges published draft rules identifying rule violations including fraudulent initial public offering, serious information distortion in financial disclosures and grave illegal activities in daily operations as major factors leading to a delisting, in response to the CSRC's call for the bourses to take more responsibility in delisting enforcement.

Experts say that the overhaul of the delisting mechanism driven by the vaccine scandal further details the delisting rules and puts emphasis on the accountability of the stock exchanges in delisting enforcement.

The Shenzhen Stock Exchange has publically said that it will unswervingly bear the responsibility in delisting enforcement, pledging zero-tolerance for the law-breaking companies which seriously damage the market order and public interests in an effort to protect investors' interests and optimize the structure of the stock market.

A long way to go

China set up a delisting mechanism in 2014, but only a few companies have been delisted.

As of May, a total of 97 companies have stopped trading on the A-share market, showed statistics from, a Hong Kong-based news portal.

The figure cannot match with that of the United States, where the New York Stock Exchange and the National Association of Securities Deal Automated Quotations have seen annual delisting of 128 companies and 303 firms respectively since 2001.

The anomaly arises from China's special national condition. The country's capital market was initially created for the state-owned enterprises to raise funds, with the number of listed companies serving as an important indicator for the local governments' performance. It led to the emergence of back-door listing and the overuse of government policies aimed at subsidizing and reorganizing the listed companies risking a delisting.

The possibility of Changsheng's delisting from the stock market might mark the beginning of a delisting wave in China, where tougher regulatory supervision is needed to keep the stock market healthy, financial commentator Su Peike wrote in an article published on the Chinese website of the Financial Times.

In the article, Su attributed the practice of buying shell companies for listing and asset restructuring of moribund listed companies to the lack of a detailed delisting enforcement.

Su believes that Liu Shiyu, chairman of the CSRC, could use the Changsheng scandal as a golden opportunity to put into practice the delisting mechanism against the background of the sweeping anti-graft campaign, despite the fact that a delisting would impact many big interest groups behind a listed company.

The financial commentator also criticized the regulator for curbing the refinancing and industrial merger of the listed companies and wantonly relaxing rules for approving initial public offering.

Since 2018, the regulator has eased rules for faster initial public offering approvals especially for unicorns.

Su, however, argues that the issuance of new shares would reduce the liquidity of the secondary market, calling on the regulator to design more favorable policies aimed at promoting the refinancing and industrial merger of the listed companies and facilitating high technology companies to go public.

Protection of retail investors

A delisting mechanism needs to be accompanied by an investor compensation mechanism.

In China, retail investors are identified as a group falling short of professional knowledge about investing in the capital market.

Su suggests that the government should freeze the assets of a listed company and its big shareholders and actual controllers when the company risks a delisting, a method that can be used to free up more capital to compensate small investors.

For the Changsheng case, small investors can file a class action to retrieve their losses as the vaccine maker is forcibly deprived of its listing status for breach of disclosure rules.

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