China’s president, Xi Jinping, is putting a great deal of effort into projecting an image as the country’s most powerful leader since Mao Zedong. Much of Beijing shut down over the weekend as scores of troops, tanks and other military vehicles streamed into the country’s capital to rehearse for an impending military parade.

But just a day after images of the country’s immense state power flooded Chinese social media, they were filled with news of a staggering plummet on the country’s stock exchanges. The government’s efforts to prop up stock prices in the world’s second largest economy hit a brick wall on Monday, as stocks suffered their biggest fall since 2007, when state intervention into the country’s bourses failed.

The CSI 300 index breached the 3,500 mark – seen by many local investors as a red line the government would not allow it to fall through – and closed down nearly 9% at 3,275. Xinhua, the Chinese state-owned news agency, called the rout “Black Monday” on Twitter.

The V-Day celebrations, due to occur on 3 September, are designed to be a showcase of Xi’s power and credibility and are clearly aimed at a domestic audience. But increasingly, when it comes to the economy, his and the government’s credibility are taking a hammering. Beijing’s reputation as skilful and competent economic managers – built up over years of breakneck economic growth – is in tatters after a two-month long stock market rescue operation has faltered.

More so than anywhere else, China’s stock market is disconnected from the economic fundamentals of the country, experts say, but nonetheless the rapid decline shows that market sentiment has fallen off a cliff.

“It is a key moment for China. The equity market in freefall, the banking system increasingly starved of liquidity, rising capital outflows, and a rapidly slowing economy,” Angus Nicholson, of IG Group, wrote in a note on Monday.

Global markets were already reeling from last week’s data, which showed the country’s manufacturing output had dipped to its lowest point since the global economic crisis. Experts say there’s a sense that it no longer matters what the government says or does, as the market is now adjusting to what it believes the reality is.

An announcement over the weekend that Chinese pension funds would invest 30% of their capital in the domestic equity markets failed to prevent the rout, revealing to some analysts the government’s complete desperation.

Christopher Balding, professor of economics at Peking University, said the move had an “obvious political nature” that made it extremely risky. “Using pension fund capital to try and prop up stock prices runs the very real risk of turning a stock market bubble into a pensions crisis,” he said.

“The policy response appears poorly thought through and managed and this latest policy initiative appears desperate to prop up prices regardless of consequences.” But despite the policy change, the market’s latest slide has wiped out the entire gains for the year to date.

According to Nicholson, that’s “a disastrous result for China, after working so hard to breathe life back into domestic equities after the 2007 crash and having spent hundreds of billions of dollars propping up the market since June”.

Anyone listening to the president would be left wondering what on earth there is to be worried about. In a speech to provincial leaders in the north-eastern province of Jilin last month, Xi told local officials that the economic growth outlook was still promising.

Xinhua reported: “Xi pointed out the Chinese economy is in good condition with unchanged factors, including sound economic fundamentals, remarkable flexibility, huge potential and room to growth. We should be confident that economic growth still enjoys promising prospects.”

And indeed, not all the latest economic indicators have been dire. While the Caixin flash PMI last week was the lowest since March 2009, the services sector showed strength in July climbing to an 11-month high. And e-commerce, perhaps the country’s most dynamic sector, continues to boom. But the country’s transition from an investment-led, heavy industry model, towards a services and consumer-led economy is proving to be a bumpy one.

Andrew Hordern, regional economist with IMA Asia, says the world will need to get used to a “slower growing, more up-and-down China”. “Transitions of this size are difficult. Firstly GDP growth will be slower than before even at the best of times. Secondly, there will be times, such as now, where the economy falters significantly,” he said.

Jie Gan, professor of finance at Cheung Kong graduate school of business in Beijing, said that based on the economic data so far, it’s unlikely there will be a hard landing. “It will be ‘under control’. But the key is not to sacrifice long-term policy for short term ‘control’,” she said. “But it is true that fully solving the fundamental problems can be a painful process, for example getting rid of excess and obsolete capacity.”

What the market is making clear now is a lack of confidence among investors in what have seemed to be fairly erratic government’s policy announcements. This month’s unexpected currency devaluation – the biggest in over two decades – was a sign to some of the government’s increasing anxiety, though it got the thumbs-up from the IMF.

The authorities’ failure to step in to stop Monday’s market tumult seems to suggest the government has given up after throwing everything at the problem. There are signs now that the country’s transition to a “new normal” is coming up against some stubborn roadblocks.

Last week, state media ran an unexpectedly frank commentary describing the fierce resistance that Xi’s reforms were meeting within the Communist party. “The in-depth reform touches the basic issue of reconfiguring the lifeblood of this enormous economy, and making it healthier,” it said. “The scale of the resistance is beyond what could have been imagined.”