By Shen Hong

SHANGHAI--China's top officials signaled over the weekend that the country's campaign against runaway debt and speculation remains a priority--spooking domestic equity markets on Monday and prompting a massive injection of liquidity by the central bank.

At a high-level meeting ended Saturday that is seen as setting the direction of Chinese financial policy for the next five years, President Xi Jinping stressed the importance of reining in high debt levels in the world's No. 2 economy and announced the formation of a new committee to coordinate financial regulation. That was in stark contrast to the last meeting of the National Financial Work Conference five years ago, which advocated reforms that would bring China's markets more in line with global peers.

Chinese investors interpreted the stern tone as signaling that a regulatory push in recent months to reduce risk and leverage in financial markets will continue full force, prompting a selloff in the country's equity markets--particularly the Shenzhen Stock Exchange known for its smaller, more speculation-prone stocks.

The Nasdaq-style ChiNext startup board finished the day down 5.1%. The Shenzhen Composite Index closed down 4.3%, after falling 4.5% earlier. The bigger Shanghai market, where large state-run companies are listed, narrowed its losses to 1.4% after falling as much as 2.5% shortly after the opening bell.

All three indexes posted the sharpest drops since Dec. 12, 2016, data from FactSet showed.

The selloff came despite faster-than-expected growth in the Chinese economy in the second quarter, as investors said the strong economic performance would give Beijing moreleeway to tighten policies.

Meanwhile, China's central bank injected a net 140 billion yuan ($20.64 billion) into the financial system on Monday morning, the largest such supply of cash in nearly six weeks. Analysts said the move was aimed at pre-empting panic among investors.

The big injection "suggests that the PBOC was in a way prepared for such market volatility and it was trying to manage people's expectations," said Zang Min, senior fixed income analyst at Hongxin Securities.

The injection may have helped fend off jitters in China's bond market, which has seen yields spike briefly in recent months during Beijing's crackdown on leveraged investment. The yield on the benchmark 10-year Chinese government bond fell 0.01 percentage point to 3.56%.

A steady Chinese yuan also helped appease some investors, analysts said. The People's Bank of China, which sets a daily "fix"--or reference rate for the band in which the yuancan trade--on Monday set that rate at 6.7562, its highest level against the U.S. dollar since early November.

"The yuan's fix is near the high end of our expectations, which also shows the PBOC's intention to stabilize markets," said a Shanghai-based senior currency trader at a Chinese bank.

Chinese equity markets were also weighed down by President Xi's call at the weekend conference for boosting the role of so-called "direct financing," or fundraising via the bond and stock markets, analysts said. Chinese regulators have been approving new stock listings at a fast pace in recent months, in an attempt to alleviate a yearslong backlog of companies waiting to go public.

While that is good for companies that want to list, some investors have complained that the influx of new listings is depressing the markets, particularly in Shenzhen where new listings have concentrated in recent years.

"This means the speed of approval for initial public offerings won't slow," said Amy Lin, senior analyst at Capital Securities.

In the first half of this year, 237 companies listed in China's domestic stock markets, raising a combined 116.6 billion yuan ($17.19 billion), nearly triple the amount raised a year earlier, according to China's securities regulator.

Yifan Xie in Shanghai and Gregor Stuart Hunter in Hong Kong contributed to this article.

Write to Shen Hong at hong.shen@wsj.com

(END) Dow Jones Newswires

July 17, 2017 04:59 ET (08:59 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.