Chinese stocks have been under siege, first by regulatory escalation in the education technology sector, followed by antitrust regulators ordering Tencent to abandon its music streaming monopoly and food delivery companies such as Meituan to increase wages and benefits for their drivers. Then, Tencent had to suspend new account registrations for its flagship WeChat app for a security update.

The avalanche of bad news caused A shares to fall more than 6% at the beginning of last week. Domestic investors have gone from thinking that regulators were only targeting a few large companies to worrying that no sector is safe and that the damage could be long-lasting. These investors had become complacent in their view of regulatory risk, but lawmakers hate domestic market volatility and have moved to calm nerves. A commentary in the state-run Shanghai Securities News said the sharp fall in prices would not continue and that "the fall brings opportunities." It then amplified the message with an instruction, "Don't panic!", noting that domestic mutual funds had more than RMB850bn available to buy A-shares.

Behind the scenes, regulators approached financial institutions to offer assurances about policy.These moves have stabilized markets over the course of the last few days, with internet stocks and capital inflows recovering, but for the calm to last, the pace of destabilizing regulatory actions must slow.

There are good reasons for lawmakers to calm down.China's securities regulators have two main functions: (i) nurturing capital markets, so that companies in favored sectors can raise funds, and (ii) preventing destabilizing volatility, especially on the downside. The crackdown on internet companies is consistent with the first objective.Rather than viewing the internet sector as a national vanguard of innovation, lawmakers increasingly see it as a source of social problems and security risks. Encouraging capital markets to invest less money in consumer Internet services and more in high-tech manufacturing reflects the government's long-term goals.But if the domestic stock market collapses when investors fear that the government is punishing companies indiscriminately, fundraising for all sectors is threatened.

China's policymakers know that domestic capital markets must develop if they are to achieve their long-term policy goals.After all, achieving global technological leadership and managing competition with the US will be a costly endeavor. They may be willing to restrict companies' access to global capital (stricter rules have halted Chinese stock offerings in New York), but this makes domestic and Hong Kong markets even more important.

For all these reasons, both the intensity and tone of the recent regulatory crackdown are likely to ease.That does not mean the campaign to comprehensively regulate internet platforms will be abandoned, as it remains a high-level policy priority. There is no going back to the unbridled expansion of years past.But the regulatory storm may be reduced to a more manageable size, which, given the attractive valuations of Chinese technology companies, could well be buying opportunities for investors with a higher tolerance for risk and volatility.