Remember the dot.com era in the U.S., especially 1999 to March 2000? Technology stocks ruled, valuations were outrageous, the economy was entering a new paradigm and “this time is different” justified prices. The Chinese markets have experienced the same hyperbolic price increases in the last 12 months.

What most U.S. investors don’t realize is how large the Chinese stock markets have grown in the last decade in terms of listed companies’ market values. The Shanghai Stock Exchange, which has more blue-chip companies, is ranked third in the world; the Shenzhen Stock Exchange, which has more technology and healthcare companies, is ranked seventh.

Chinese “A” shares are listed on the Shanghai and Shenzhen exchanges. Chinese companies can also list “H” shares on the Hong Kong Exchange, which is ranked fifth in the world. Several hundred Chinese companies have also listed their stock in the U.S. In total, Chinese stocks had a market value of $10 trillion at the end of May, second in the world to the U.S. with $27 trillion.

The Chinese exchanges had a previous stock market bubble that deflated in 2007 with stocks dropping 72 percent and languishing for seven years. Starting in mid-2014, stock prices started to increase steadily and experienced hyperbolic moves in 2015. The Shanghai Index was up 60 percent and the Shenzhen Index 122 percent when prices peaked on June 12, 2015.

Since then both exchanges have technically fallen into bear markets, defined as a market decline of 20 percent or more. The Shanghai Index has fallen 28.6 percent from its peak and the Shenzhen Index 33.2 percent. It was a 12-month bull market and a three-week bear market thus far. $3 trillion of market value has been wiped out to date.

Where the market goes from here is anyone’s guess.

Chinese citizens have accumulated $21 trillion of savings, thus the Chinese markets are retail-driven as opposed to institutional; individuals account for 90 percent of stock trading. The Chinese government seems to have encouraged the bull market as they reduced lending rates four times since November 2014. And Chinese investors have not been shy about using margin (borrowing money to buy stocks) as it increased from 400 billion yuan to 2.2 trillion yuan ($354 billion) in the last 12 months.

China is a big country of 1.13 billion people, but over 40 million new accounts were opened in 2015. Although there are now about 250 million brokerage accounts in China, it is estimated that there are fewer than 100 million investors — less than 10 percent of the population. The typical account trades once a month so the Chinese are more speculators than long-term investors.

Why would the Chinese government encourage its citizens to invest in the stock market?

Property prices have started to deflate in most cities so this is an alternative way to create wealth. Also, Chinese nonfinancial corporations have some of the heaviest debt balances in the world; higher stock prices would allow them to replace debt with equity and reduce risk. Higher stock prices would also allow private or state-owned companies to go public; initial public offerings (IPOs) set new records in 2015. In fact, many Chinese companies that had listed in the U.S. and Hong Kong are delisting and listing on the Shanghai and Shenzhen exchanges because of higher valuations there.

Deflating prices in the property and stock markets could also deflate domestic confidence and hinder China’s policy to become more of a domestic consumption-driven economy as opposed to investment and export-driven. It certainly will not help China sustain its 7 percent economic growth objective.

It may also delay China’s stocks being included in world market indexes such as the MSCI Emerging Market Index, which was one of the reasons for recent Chinese investor enthusiasm. Beijing has some policy tools to help stabilize the markets, such as raising margin requirements and restricting short-selling and new IPOs. Time will tell whether they can prevent an all-out collapse of the market.

About The Author Robert Klemkosky

Robert C. Klemkosky is professor emeritus of finance at Indiana University Kelley School of Business. He was the founding dean of SKK Graduate School of Business at Sungkyunkwan University in Seoul, a top MBA program in Asia, and currently is chief investment strategist at Wallington Asset Management, an Indianapolis-based money management firm.