[West Street Observation] Make problem stocks only worth "bargain prices"

The strict regulatory storm affecting China’s A-shares continues to intensify. On a single day, 10 listed companies were investigated and fined, and an “all-around” regulatory system with no blind spots is forcing listed companies to strengthen their awareness of legal and compliant operations. Under the strict regulatory storm, the differentiated valuation ecosystem in China’s A-shares is being accelerated, with high-quality individual stocks attracting even more attention, while problem stocks are being continuously discarded.

Late on April 3, 10 listed companies including Tailing Digital and *ST Guodian were either investigated or fined. Among them, Tailing Digital, and others “took a tumble” over violations of rules on information disclosure; Wang Minglong, one of the controlling shareholders of Xianhe Shares, was filed for investigation on suspicion of short-swing trading. Yingjixin and Shuangliang Energy-saving, which tried to ride trending topics, also received formal administrative penalty rulings. In addition, Yishang Display, which has already been delisted, and relevant responsible parties also received corresponding penalties.

With penalty notices landing in large numbers, they convey a more definite regulatory signal to the market. No blind spots in regulation; violations will be pursued and held accountable. As long as you touch the red line of illegal and non-compliant conduct in the capital market, delisting is not a “safe harbor” to evade punishment.

Data previously released by the CSRC show that in 2025, a total of 701 cases involving violations of laws and regulations in securities and futures were handled, with fines and confiscations totaling more than RMB 15.474 billion, and 172 case clues involving suspected crimes were transferred to public security authorities. Malicious financial fraud cases such as Fujian Pharmaceutical and Pulley Pharmaceutical were severely punished; in cases such as the manipulation involving Jinsui Chun and the violations involving improper reductions in holdings by Tian Han, fines and confiscations exceeded RMB 100 million. Intermediary institutions such as Jining Zhonghe, Yatai Law, and Donghai Securities were punished in accordance with the law.

The most direct impact of high-pressure regulation is to accelerate the process of differentiated valuation in China’s A-shares. This is because strict oversight guides market expectations, reshapes capital preferences, and stock valuation performance of individual companies on the exchange is increasingly showing a “polarized” trend of extreme highs and lows.

Problem stocks burdened with risks are turning cold. Stricter regulation makes the investment risk of problem stocks increasingly high, prompting everyone to avoid them. Whether it is violations in information disclosure or improper reduction of holdings, once a listed company triggers an early warning of illegal and non-compliant conduct, it will be kicked out by market capital from the “watchlist” as the first response. The sharp drop in the next day’s share price of those that were filed for investigation is the best proof.

Once the risk alarm is sounded, the valuation shrinkage of problem stocks is only just beginning. Value investors will exit first to hedge against risk, and the outflow of panic capital will further pressure the company’s share price; most of what remains in the market are some speculative funds. But as liquidity becomes worse and worse, speculative capital also loses the “soil” to survive, and ultimately will choose to exit as well.

The process by which capital from all directions exits is also the process by which the valuation of problem stocks continues to shrink. In the course of this, the more it falls, the fewer buyers there are; the fewer buyers there are, the more it falls. The vicious cycle accelerates again and again, pushing down the valuation of problem stocks, and problem stocks are thus accelerated out of the market.

Meanwhile, high-quality growth stocks and leading stocks will be increasingly hot. In a market environment shaped by strict regulation, capital pays more attention to the safety of individual stocks. The more a stock adheres to rules and has stable performance, the higher its safety coefficient, and the more likely it is to win favor from various types of capital.

Taking patient capital as an example, long-term shareholding places higher requirements on the fundamentals and safety of the investment target. Low-risk high-quality stocks and growth stocks will become the first choices for allocation.

Under strict regulation, capital keeps withdrawing from problem stocks and theme stocks, and flows into core assets characterized by solid performance, compliance and transparency, and standardized governance. The valuations of high-quality companies are re-examined, forming a positive feedback loop of “the strong get stronger.” With value re-assessments repeated time and again, the valuation center of gravity for high-quality and growth stocks will naturally rise in a spiral.

Good companies enjoy valuation premium, while problem stocks are only worth a “cabbage price.” Under strict regulation, this will be the future trend of the valuation system in China’s A-shares.

Beijing Business Daily Commentator Dong Liang