China small-cap stocks extend 'Black Monday' rout amid regulatory shake-up rattling markets

An investor looks at an electronic board showing stock information at a brokerage house in Shanghai.
An investor looks at an electronic board showing stock information at a brokerage house in Shanghai.PHOTO: AFP

SHANGHAI (REUTERS, BLOOMBERG) - China's stocks slumped on Tuesday (July 18), led by small-cap shares, extending what some are calling a "Black Monday" rout on fears the outcomes of a top-level closed-door conference on regulation over the weekend may be tougher rules and a 'super-regulator'.

Market watchers are blaming the panic on news out of a government conference on the financial system held over the weekend. At the National Financial Work Conference, chaired by President Xi Jinping on Saturday, officials decided to create a special committee to oversee the regulation and deleveraging of China's financial system over the next five years.

The Shanghai Composite Index was down 0.6 per cent at midday on Tuesday, after falling as much as 2.6 per cent earlier in the morning. The ChiNext gauge of mostly technology companies was 0.8 per cent lower, after sinking 3 per cent earlier in the day.

Sunac China Holdings shares and bonds plunged Tuesday after a local media report that domestic banks are reviewing its credit risk following a deal to buy assets from Dalian Wanda Group, a firm that has attracted scrutiny from China's leaders for its prolific deal binge.

The shares fell as much as 13 per cent, the biggest intraday decline since July 2015. The developer's 2019 US dollar bonds were set for the largest decline on record, falling 4.1 cents to 99.3 cents on the dollar.

Stocks plummeted across China on Monday, with 500 stocks hitting their 10 per cent daily limit and 1,200 falling 7 per cent, according to the South China Morning Post.

Despite the release of better-than-expected second-quarter GDP numbers that day, the ChiNext sank 5.1 per cent in its biggest loss in seven months, extending its retreat this year to 16 per cent. That's worse than any of the 96 global benchmarks tracked by Bloomberg, and compares with a 10 per cent advance by the MSCI World Small Cap Index.

The selloff spread to the benchmark Shanghai Composite Index, which dropped 1.4 per cent, the most since December, trimming its gain this year to about 2 per cent.

President Xi said the central bank would take a bigger role in defending against risks with a Financial Stability and Development Committee to be set up under the State Council.

The new committee will help to coordinate on financial reform and regulation of markets as well as monetary and industrial policy, a central bank official told the official People's Daily in an interview published on Tuesday (July 18).

The committee was set up because financial oversight in China is not coordinated, said Lu Lei, who heads the financial stability department at the People's Bank of China (PBOC). There has been a lack of supervision of the market, he said, describing the situation as "full of chaos".

Regulators oversee different parts of China's complex financial sector, and no singular regulator has complete visibility of capital movements in the system.

"Risks in China's financial market can be controlled, but nonperforming loan risks, liquidity risks, shadown banking risks...property bubble risks (and others) are increasing," said Lu.

In an attempt to curb China's addiction to debt and defuse financial risks, authorities have intensified curbs on speculative investments, shadowbanking activity and excessive credit growth over the past year. PBOC will also take on a bigger role in macro-prudential management and in averting systemic risk in the financial system, Xi said in his comments on the weekend.

The weekend meeting has got investors worried about tighter rules in the financial market, said Zhang Gang, Shanghai-based strategist at Central China Securities Holdings. "People are rushing to cut risks. ChiNext companies got hurt most from such risk-off sentiment, as many ChiNext firms are highly leveraged."

Strategists also interpreted discussion at the conference on the need to increase direct financing as a signal that officials may accelerate the approval of initial share sales, diverting investor cash from existing stocks.

Beijing sees financial security as a vital part of national security and has been looking to crack down on risky behaviour in the financial markets, such as insurers selling high-risk products and companies taking on excessive debt.

The CBRE said in the statement on its website it would strengthen controls to avoid financial risks, including those related to liquidity, credit and shadow banking. It said there was a "step-by-step" plan to reduce "chaos" in the market, without giving details.

The regulator will also boost cooperation with other bodies, something Beijing sees as key to cutting risks. Regulators now oversee different parts of a complex financial sector, but no single watchdog has a complete picture of the overall system.

"CBRC will resolutely follow the leadership of the Financial Stability and Development Committee, actively coordinate with the People's Bank of China to fulfil macroprudential management duties, and strengthen cooperation with other financial regulators, ministries and local government," it said.

The two other main financial regulators are the China Securities Regulatory Commission and the China Insurance Regulatory Commission.

The banking watchdog added failure to catch, flag and deal with financial risks in a timely manner would be treated as a dereliction of duty, parroting comments made by Xi at the once-in-five-years government work conference that ended on Saturday.

In 2015, a poorly coordinated response to a stock market crash in China led to scrutiny of the government's response, with Premier Li Keqiang openly criticising financial regulators'performance.

The CBRC will also convene a meeting in the near future with banking regulators from around the country to discuss how to implement measures decided at the work conference.