Any time governments try to control free markets it is bad news. Even if ICOs are getting out of hand it should be the free market that sorts the wheat from the chaffe. I don't think the crypto markets are overreacting to this news. Chinese citizens are huge adopters of crypto and if their government impedes them in anyway it will permanently effect the crypto market cap. Also, at this point, blocking exchanges from converting to fiat would make it very difficult to transact in any crypto currency within China. It would effectively be building a firewalll between fiat and crypto to slow it down and prevent it from spreading like wild fire to protect government backed fiat. If that is the case it is a dire situation.