OREANDA-NEWS. February 04, 2015. Chinese investors are finally dumping shares in loss-making companies after years of speculation on them in a sign that punters are at last taking seriously tighter regulations and new delisting rules that make holding their stock a huge risk.

The struggling firms have often been market outperformers in China as they were almost never delisted, providing an implicit floor on downside risk that speculators have exploited to their advantage.

But China's broad efforts to reform its capital markets, and in particular recent rules aimed at fostering a robust stock market and efficient allocation of capital, signal an end to such policy aberrations.

"Tighter rules and stricter implementation are pushing investors away from 'junk' shares'," said Xiao Shijun, analyst at Guodu Securities in Beijing.

"It's an attitude reversal; investors are finally turning to blue chips, given their surprisingly high returns of late," he said.

An unprecedented 38 firms published obligatory formal delisting warning statements in December, many citing fraud investigations as the cause, after the China Securities Regulatory Commission (CSRC) issued tougher delisting rules in October.

So long as CSRC enforces the rules, most of these 38 firms will be kicked out of the Shanghai or Shenzhen stock exchanges within a year, though in the past the regulator has failed to walk the talk.

This time around, however, Chinese investors are bailing out of at-risk shares as the regulators show more zeal in cracking the whip.

Two thirds of the mentioned firms have suffered sharp stock price falls since December. Zhuhai Boyuan Investment Co , for example, has lost 36 percent to 7.52 yuan, while Weifang Beida Jadebird Huaguang Technology has dived 32 percent to 5.27 yuan before both companies suspended trading on Dec 22.

Indeed, over the past three months shares in these 38 companies climbed only 2.3 percent on a weighted average basis, massively underperforming China's blue-chip CSI300 index , which gained 39 percent during the same period.

In 2013, by point of comparison, the same companies outperformed the CSI300 by an average of six percentage points.

Only 78 Chinese firms have been delisted since China established its modern stock market in 1990 and not a single stock was delisted from 2008 until mid-2014.

There are two primary reasons for this. Firstly, most firms that manage to get through the highly regulated IPO queue are well connected politically and able to evade being evicted from the boards.

Secondly, the length of the IPO queue, in which hundreds of companies are still mired, makes an existing ticker valuable real estate. Using a process called a reverse merger, a public company can acquire listed companies, allowing the acquiring firm a ticker without having to queue for an IPO - such acquisitions can also produce the massive stock pops speculators are looking for.

Now regulators say there will be no exceptions and they even have a first target. China Erzhong Group Deyang Heavy Industries Co Ltd, under a trading halt since last year, looks likely to be delisted after posting a fourth year of losses of about 7.8 billion yuan.

Under current rules, the CSRC will halt trading in shares of companies with three consecutive years of losses, then eject them one year later if there is no turnaround in profitability.

In addition, local media reported 18 firms are expected to remain in red for the third straight year. About half of them have suffered heavy losses in their share prices since late 2014.

However, speculative investment continues in some loss-making firms, particularly those backed by powerful parent companies. For instance, Sinovel Wind Group has seen its share prices jump 40.4 percent since November.

"With the CSRC at a ministry level and having only the same administrative power as some local governments and major companies, its ability to enforce rules is always in question," said a trader at a major Chinese brokerage.

"Political power plays a major role in China and the equity market is no exception.