The surge in China's stock market is reminiscent of the 2015 bubble. What sets this time apart?

• The Chinese stock market doubled in value over six months from 2014 to 2015, while leverage increased, as Aaron Costello, regional head for Asia at Cambridge Associates, highlighted Monday.
• We're not in the danger zone yet, as the market hasn't run up as much and leverage is lower.
• Whether economic growth will be sufficient to sustain a market rally is less clear.

Analysts noted that the current surge in Chinese stocks is unlike the market bubble experienced in 2015.

On Monday, major mainland China stock indexes rose more than 8%, continuing a winning streak fueled by stimulus expectations. The trading volume on the Shanghai and Shenzhen stock exchanges reached 2.59 trillion yuan ($368.78 billion), surpassing a previous high of 2.37 trillion yuan on May 28, 2015, according to Wind Information.

The Chinese stock market doubled in value over six months from 2014 to 2015, while leverage increased, as Aaron Costello, regional head for Asia at Cambridge Associates, highlighted Monday.

We're not in the danger zone yet, as the market hasn't run up as much and leverage is lower.

According to Wind Information, the stock market leverage in percentage and value was significantly higher in 2015 compared to the data revealed on Monday.

In June 2015, the Shanghai Composite surpassed 5,100 points, a mark it has not achieved since the subsequent market decline. That year, MSCI postponed adding mainland Chinese stocks to its globally tracked emerging markets index. Additionally, negative sentiment was fueled by Beijing's fluctuation on a trading crackdown with borrowed funds and a sudden devaluation of the yuan against the U.S. dollar.

The yuan is currently trading stronger against the greenback, despite a decline in foreign institutional allocation to Chinese stocks to multi-year lows this year.

The Shanghai Composite finished at 3,336.5 on Monday, prior to the week-long holiday marking the 75th anniversary of the People's Republic of China. Trading will resume on Oct. 8.

In the lead-up to the 2015 stock market surge, Chinese state media promoted investing in the stock market, and easy regulations permitted individuals to purchase stocks using borrowed funds. For decades, Beijing has aimed to expand its domestic stock market, which, at around 30 years old, is significantly younger than the U.S. market.

Strong policy signals

The market experienced a 16% increase in the CSI 300 index, its best week since 2008, following economic support and programs that encouraged institutions to invest more in stocks.

On Thursday, Chinese President Xi Jinping led a high-level meeting to halt the decline of the real estate market and strengthen fiscal and monetary policy. The People's Bank of China cut interest rates and the amount existing mortgage holders need to pay last week.

"The policy is more concerted this time than in 2015, but the economy faces greater headwinds now compared to then, as stated by Zhu Ning, author of 'China's Guaranteed Bubble.'"

A week of significant stock market growth does not necessarily indicate that the economy will experience a similar recovery.

Despite reaching a high in February 2021, the CSI 300 index remains more than 30% below its peak, which was higher than its 2015 high.

Stephen Roach, a senior fellow at Yale Law School's Paul Tsai China Center, highlighted in a blog post published in the Financial Times opinion section on Tuesday that the Japanese experience provides an important perspective, as the Nikkei 225 Index bounced four times by an average of 34 per cent on its way to a 66 per cent cumulative drop from December 1989 to September 1998.

Retail sales and manufacturing growth have slowed down based on recent economic data, which has raised concerns about China's ability to achieve its full-year GDP target of 5% without additional stimulus.

According to Costello, the key to resolving the current situation lies in addressing the missing information regarding the local government finances. This would provide a confidence-boosting measure, as it would reveal how the government plans to address their financial challenges. In the past, local governments relied heavily on land sales for revenue to fund public services.

Despite Chinese authorities lowering interest rates and loosening home buying rules, the Ministry of Finance has not yet declared additional debt issuance to stimulate economic growth.

Animal spirits at play

Z-Ben Advisors' founder and managing director, Peter Alexander, anticipates that the fiscal stimulus announcement in late October will be less than what markets are hoping for.

It may have investors a little over their skis, as people like to say," he said Monday on CNBC's "Street Signs Asia.

In his written response, he stated that based on his experiences in 2007 and 2015, the Chinese stock market rally could continue for another three to six months or abruptly end.

Alexander stated that the Chinese market's surge of buying was due to pure animal instincts, but there are market risks due to the unpreparedness of the stock trading system.

The number of new retail investors in China this year is not publicly available, but reports suggest that brokerages are experiencing an influx of new requests, similar to how individuals rushed to invest in the stock market a decade ago. The Shanghai Stock Exchange has confirmed that transactions at the market opening have been slower than usual.

Looking for earnings growth

"The catalyst was missing in China, but it has now been identified to unlock its value," Costello stated.

"If corporate earnings do not increase, this is merely a temporary increase."

Earlier this year, Beijing attempted to halt a market slump by replacing the head of the securities regulator. Despite an initial surge in stock prices, the rally eventually fizzled out in May.

Earnings per share forecasts have stabilized, which can cause stocks to surpass May levels, according to James Wang, head of China strategy at UBS Investment Bank Research, in a note on Monday.

A stronger Chinese yuan, lower U.S. interest rates, increased share buybacks, and a more coordinated policymaker response are all factors that support gains, according to Wang. His latest price target of $70 on the MSCI China index is now just a few cents above where it closed Monday.

— CNBC's Hui Jie Lim contributed to this report.