1. I think China want to temporarily crash the market so they can collect more BTC (and other coins dirt cheap) before announcing that they are officially adopting. At that point BTC (and other crypto) will sky rocket.
2. They don't want their citizens to trade cryptocurrency and earn (relatively easily) in fear of losing their cheap labor force. They will then try to make it as difficult as possible for it to flourish in their country.
Which is it???
I think it's neither of these things. I honestly think that the government is in a panic over capital flight overseas... and was in a panic over the rate at which the BTC/crypto prices were rising. They know they can't stop the adoption of cryptocurrencies, but they want to steer people towards tightly regulated (AML/KYC) exchanges that will help enforce the yearly capital outflow allocation that each citizen gets.
Right now, the Chinese exchanges are all operating as shadow banks. With cryptocurrencies becoming such a huge market, the government felt the need to step in. They knew it would cause a crash, and I'm sure they were glad to see that, but I don't think that was the primary intention.