To commemorate the 70th anniversary of Japan's World War II surrender, China planned a 12,000-soldier march down Beijing's Chang'an Jie—Eternal Peace Street—on Sept. 3. For President Xi Jinping, it was a chance to project an image of calm, order, and strength. Unfortunately for Xi, China's financial markets are sending a completely different message.

Since the stock market started melting down in mid-June, wiping out $5 trillion in shareholder value, the government has tried a series of increasingly desperate measures to halt the slide. The latest looked like an attempt to shift blame: In a campaign to crack down on alleged market manipulation, it arrested executives at Citic Securities, China's largest brokerage, an employee of the China Securities Regulatory Commission, and a journalist at Caijing, a business magazine.

The Citic executives, including Managing Director Xu Gang, admitted insider trading, according to Xinhua, the state-run news service. The journalist, Wang Xiaolu, admitted wrongly reporting on July 20 that the CSRC was studying whether to end stock market support measures, causing panic and confusion, Xinhua said. A Citic representative declined to comment, and Caijing didn't answer calls. The magazine has said it will cooperate with authorities.

The government also continued to intervene more directly. It ordered brokerages to contribute an additional 100 billion yuan ($15.7 billion) into a stock market rescue fund. In the currency market, the government has spent hundreds of billions of dollars to stabilize the yuan following a surprise devaluation on Aug. 11. And the People's Bank of China (PBOC) cut interest rates on Aug. 25 for the fifth time since November. Still, investors weren't impressed: The Shanghai composite index fell 2.2 percent in the three days leading up to the victory march. It's now down 39 percent from its June peak.

Stock turmoil is casting a shadow over Beijing's victory commemoration.

Photographer: Ng Han Guan/AP Photo

Xi's government is struggling to balance a pledge to loosen its grip on the economy with the desire to ensure stability and maintain confidence in the ruling Communist Party. The battle between the invisible hand of the market and the iron fist of the government creates confusion and chaos, making China the biggest threat to the global economy and financial markets. "They don't quite get how to work with these markets, don't know what they're doing—that view is already out there," says Nicholas Field, emerging-markets strategist at money manager Schroders in London. "It's one of the reasons why global markets have sold off."