China just had a ‘Black Monday’

Shen Yuxi (L), introduces analysis software to investors at a “street stock salon” in central Shanghai, China, September 5, 2015.REUTERS/Aly Song

Stocks plummeted across China on Monday, with 500 stocks hitting their 10% daily limit and 1,200 falling 7%, according to the South China Morning Post. They’re calling it another‘Black Monday’

Analysts 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, officials decided to create a special committee to oversee the regulation and deleveraging of China’s financial system over the next five years.

“The regulator will continue to crack down on violations of securities laws and regulations, including insider trading and market manipulation,” said Jiang Yang, vice chairman of the China Securities Regulatory Commission during an exclusive interview with state media outlet Xinhua.

The message out of that meeting was clear — China’s financial system is not turning to the bad old days (i.e. last year).

What this means is that things are not going back to normal. There’s a new normal in China now.

After allowing big, international dealmaking financial firms to grow at a breathtaking clip, the government started cracking down on them months ago. The aim was twofold — keep money in the country, and stop these companies from taking on too much risky debt.

Chairman of Anbang Insurance Group Wu Xiaohui attends the China Development Forum in BeijingThomson Reuters

Firms like Anbang Insurance, which bought the Waldorf Astoria, and HNA, which has also been snapping up US assets, started to experience uncomfortable run-ins with the government, despite their close connections to the Communist Party. The Chairman of Anbang, for example, was taken into custody even though he’s married to late Chinese leader Deng Xiaoping’s granddaughter.

In its story about the conference, Xinhua — which is widely seen as the voice of the Chinese government — took a moment to give these firms a shoutout (n0t a good thing if they want to go back to working the way they used to).

“Chinese insurers grabbed headlines by using leveraged money to buy shares in listed companies, triggering sharp volatility in the market late last year,” it said.

To be fair, though, it looks like no one is safe — not even one of the richest men in China, billionaire Wang Jianlin of Dalian Wanda Group. According to Bloomberg the government found “violations” in six of his overseas investments, including one for US-based Carmike Cinemas. That means the government will direct banks not to fund his projects.

This instability in the financial sector is taking place under a strange backdrop as China reported solid Q2 2017 economic growth numbers. Real GDP growth held steady from the previous quarter at 6.9%. June industrial production grew at 7.6%, up from 6.5% in May.

“The effects of previous liquidity tightening and the still ongoing financial regulatory shake-up are evident in money and credit data, but have not yet reached the real economy,” Societe Generale analyst Wei Yao explained in a note to clients Monday morning.

In fact, the real economy is looking like more of the same we’ve seen from China for years. In Q2 there was significant growth in overheated or overlevered sectors — like real estate and steel — that the government has talked a lot about reforming since 2014.

For obvious reasons this is a balance that Chinese officials would like to continue striking. In her note, Yao points out that, in a way, China’s financial firms have something to be grateful for. If the government wanted, it could try to turn this five-year deleveraging project around much faster.

From Societe Generale (emphasis ours):

Over the weekend, the high-profile National Financial Work Conference chaired by President Xi Jinping elevated the goal of safeguarding financial stability and strengthening the regulatory framework to a policy priority of strategic importance. It is decided that a special commission will be set up directly under the State Council to oversee financial stability and guide the financial sector to better serve the real economy. To us, these announcements signal that lowering financial leverage and stabilizing corporate debt levels is a medium-term project that Chinese policymakers are keen to see through, but there is no rush to get it done this year.

See, guys? Xi has your back.