The Chinese stock market as measured by the Xinhua China 25 Index (FXI) has declined 18.3% in the last 3 months.

The Chinese government is doing everything it can to prop up the company's faltering economy and stock market.

The Chinese government recently drastically increased brokerage financing capabilities. Nothing screams ‘bubble' more than investors buying on credit.

Heavily leveraged stock market speculation in the 1920's is in large part what caused the Great Depression. Heavily leveraged real estate speculation in the early and mid 2000's was the primary driver of the Great Recession of 2007 to 2009. If history teaches us anything, it's that buying overpriced assets with leverage results in bubbles. The thing about bubbles – they always pop at some point.

Bubbles always come with ‘irrational exuberance' – the idea that asset prices will go up indefinitely. Investors in the 1920's assumed stock prices would continue rising as more people purchased. Real estate investors felt the same way in the early 2000's.

Perhaps the best example of irrational exuberance is the late 1990's early 2000 tech bubble. Investors were buying businesses that had no earnings for astronomical price-to-sales ratios. The idea that businesses even needed to make money anymore was being questions. Businesses exist to make money. If a business isn't making money now, don't invest in it (as a general rule).

The Chinese stock market has all the signs of a bubble. It is being propped up by cheap credit. Investors have long been overly exuberant on China – blindly assuming the country can grow at 10%+ a year indefinitely.

The problem with China's economy is that a large portion of it is controlled by the public sector. Total government expenditures account for 24.8% of domestic output.   Interestingly, the United States actually has a higher percentage of government expenditures to GDP at ‘well over one-third (33%)' according to heritage.org.