CHINA’S efforts to support its beleaguered stock market have an unwanted results, with speculators chasing unlikely targets.

Shares tagged with a high-risk warning from stock exchanges, such as companies with negative net assets or two straight years of losses, have jumped an average of 31 percent over the past month. That’s around double the pace of a broader rebound in small-caps, while the Shanghai Composite Index is up 7.8 percent.

Market support measures announced since late October, including easing of trading restrictions, boosting liquidity and support for small companies, have helped fuel the frenzy, analysts say. Policies to encourage mergers and acquisitions have lured bets on struggling firms on the assumption they might be targeted by companies seeking to list in the A-share market via reverse takeovers.

“The shift in attitude from regulators has fostered a preference for these small, poor-performing shells,” said Yang Ziyi, fund manager at Shenzhen Sinowise Investment Co.

DEA General Aviation Holding Co. and Harbin Gong Da High-Tech Enterprise Development Co., for example, have jumped 71 percent and 70 percent respectively since the Shanghai Composite fell to a nearly four-year low Oct. 18.

“It’s a good investment strategy in a downbeat market,” said Sun Jianbo, president of China Vision Capital Management in Beijing. “As long as a firm has the value of being a potential shell, people will buy into its shares,” said Sun, adding that he is considering investing in such stocks.

The number of shares traded on the ChiNext Composite Index reached a record high of 8.7 billion Tuesday last week, while turnover hit the highest since July. Although a small portion compared with the main board, it is seen as a reflection of the current small-cap excitement.

“To rescue the stock market, regulators are relaxing their grip over hot money,” said Xiong Qi, Beijing-based deputy head of research at Windsor Capital Management Co. “Small funds and retail investors are following” speculators, he said.

Recent rallies in the wider market have underlined the difficult balancing act regulators have between supporting stocks while trying to curb the excesses of speculation. The Shenzhen Stock Exchange on Tuesday said it would step up monitoring the abnormal surge of Hengli Industrial Development Group Co. The shares jumped the next day and it has rallied 319 percent over the past month to be the best performing A share.

This came as the Shanghai Stock Exchange said Nov. 2 that it was tweaking its approach in order to lower “unnecessary” barriers in stock trading. That followed a slew of measures to boost liquidity to ease share pledging risks.

“After the recent changes, as long as there is no insider trading, it’s as if all trades can proceed more freely,” said Zhang Gang, a Central China Securities Co. strategist in Shanghai.

Buying struggling stocks for their shell value is fraught with risk, analysts warn. China has simplified the rules for companies to list, while a planned new stock board for high-tech companies could potentially dampen demand for potential reverse takeover targets.

The country’s stock exchanges have issued at least 10 delisting warnings to companies found to have breached accounting regulations this year, the highest amount in at least 9 years. Once delisted, shares would lose value and be transferred to trade on the off-the-counter market with limited liquidity, according to Shen Zhengyang, a Shanghai-based strategist with Northeast Securities Co.

“The trade only works under the premise that such stocks will never be delisted, which is unrealistic,” Shen said. “Such gains will never last long.” (SD-Agencies)