(Reuters)

China's ruling Communist Party has made it clear that it has a mortal enemy: social unrest.

Separately, it has also made it clear that the Chinese people should be heavily invested in the stock market.

And so, dutifully, the Chinese people have done just that, spurring the longest bull market in the country's history — the glorious 100% rally of the Shanghai Composite over the past year.

Unfortunately, it looks as if that rally may be coming to an end. This week, the Shanghai composite had its worst week since 2008, falling 6.5% on Friday. It is now officially in correction territory.

“The tide is going to go out, and there’s going to be a lot of people without their swimming trunks on,” Ewen Cameron Watt, chief investment strategist at BlackRock — which oversees $4.8 trillion as the world’s biggest money manager — said in an interview on Bloomberg Television in London. “We’re seeing it deflating quite rapidly.”

When that happens, these two separate ideas — investing in the stocks and social unrest — could come together and turn China's Shanghai Composite dream into a nightmare.

(Yahoo Finance, Business Insider)

Stock-junkie nation

In China, where even farmers in remote villages are borrowing money to lever up their new trading accounts, this has been met with alarm. Not just from China's new traders, who often blame foreign governments for the market's death drop, but also from the government.

(WIND Information)

Last week, Chinese authorities enacted new rules to try to curb margin trading and short selling. This after a 32-year-old man borrowed four times his investment in China Railway Rolling Stock Corp Ltd., lost $280,000 when the stock fell 30%, and then jumped to his death.

It's not hard to see how this situation could get ugly when the market falls. According to data collected by Bloomberg, 60% of China's new traders stopped going to school at junior high. Over 6% can't read.

"The new survey data add to the impression of a rally fueled by inexperienced retail investors," Bloomberg economist Tom Orlik wrote in a research note. "That doesn't mean it can't be sustained. China has a large population with a substantial volume of savings and limited alternative investment options.

"It does mean that the trajectory of China's markets will be unpredictable, and prone to sudden reversals as sentiment shifts."

And if market sentiment shifts, so will the people of China.

A dangerous game

It's not hard to see why this is dangerous. It's also not hard to see why China is playing this game. Its economy has been slowing for about a year, and this time, unlike the country's last economic scare in 2009, Chinese banks can't swallow a bunch of bad corporate debt from unproductive companies (especially in the property sector) and government-infrastructure investments.