In a front-page commentary on Tuesday, the China Securities Journal said the nation’s “liquidity bull market” was “taking a break.” Future gains would be “slow” and driven by government efforts to reform state-owned companies, the paper said, echoing an earlier article by the state-run Securities Times.

The takeaway is that authorities are trying to discourage speculative bets on the highest-flying stocks, Yan said. Instead, the government wants to steer money toward state-run companies, which tend to trade at lower valuations.

The message appears to be sinking in. Margin debt, a favorite tool of speculators, has dropped for four straight days on the Shanghai Stock Exchange. Technology shares, which almost doubled this year, lagged behind the broader market this week. Government-run utilities, meanwhile, posted some of the biggest gains.

Eoin Treacy's view

If the chatter on Mrs.Treacy’s Wechat network is anything to go by, speculators have been heading for the door in droves in response to this week’s drawdown. That would be in line with reports of margin debt contracting. 

The Chinext Index of Shenzhen listed growth companies has a P/E of 98. 79 of its 100 constituents were down the daily limit of 10% today. Trading was halted on 11 more. The Index was the primary destination of speculative flows over the last six months and is now rapidly unwinding its overbought condition following an accelerated advance. 

This week’s additional decline suggests potential for a ranging consolidation which would have allowed mean reversion to take place in an orderly fashion is now increasingly unlikely. Once support has been found a potentially lengthy period of supporting building will probably be needed to help rebuild confidence. 

It is also worth considering that equity index options started trading in China on a limited basis in February. Access to derivatives and leverage is new to many Chinese investors and options may have contributed to both the recent rapid rise and even swifter fall to date. It will probably take some time for the market to settle down as positions are unwound. 

This is a major move which has caused contagion across a significant spread of shares. Those that exhibit early relative strength will be doing so for a reason and may offer a clue to the sectors which will lead in any recovery.