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China GDP beat expectations, but its markets are rattled — here's why

Key Points
  • The Shanghai Composite was down almost 2.5 percent at one point and the Shenzhen Composite fell more than 3 percent, but both markets recovered some of their losses
  • China said its second-quarter GDP growth was 6.9 percent against the prior year, topping expectations

It's that time again: China's second-quarter GDP growth beat analyst expectations on Monday, but markets stayed in the red, with little sign of strength even after the numbers surprised.

Mainland markets traded in negative territory for the first half of the day, with the Shanghai Composite down almost 2.5 percent at one point and the Shenzhen Composite down more than 3 percent. After the GDP data release, however, some of those losses were recovered and the Shenzhen Composite was down 2.2 percent and the Shanghai Composite was down only 0.11 percent at 11:51 a.m. HK/SIN.

The ChiNext, the start-up board at the Shenzhen Stock Exchange, was down almost 5 percent on the day, but recovered somewhat as trade continued.

Investor sentiment was likely weighed down as a major once-in-five-years government work meeting from the weekend indicated Beijing was looking to increase control over the economy.

The meeting is usually overseen by Premier Li Keqiang, but this year, President Xi Jinping also addressed the conference, making it clear the main focus was to reduce financial risks. The presence of Xi underscored the importance of the closed-door meeting, at which the government announced it would establish the State Council Financial Stability and Development Commission to oversee the financial sector. Larry Hu, China economist at Macquarie, called the conference result "more significant than it looks," referring to the potential power that this new committee could eventually have.

The keyword, "risk," appeared the most in the meeting notes, mentioned 31 times, while "regulation" was mentioned 28 times, according to an analysis by Credit Suisse. There's a lot of reading between the lines when it comes to China, and investors were likely spooked by the tone.

What that translates to is tighter control over the financial system and the economy, which could pose further strains as China's economy transitions to new sources of growth. All that could upset Beijing's main priority at the moment of maintaining stability and calm ahead of a major Communist Party leadership change.

While the government has yet to release details on how the new committee will operate, the general market chatter is that it could be a potential predecessor to a "super-regulator," one body that unites China's three main financial regulators — securities, banking and insurance. The idea is that it would allow regulators to act more in tandem as they have in the past crossed lines.