New investors plow headlong into a frothy stock market, buying shares on margin. Then as the market cools down, the selling and margin calls accelerate. That is what the Chinese stock market, one dominated by retail investors, has seen in the past month.

"Everyone, from translators, to taxi drivers to investor relations, was checking their phones every few minutes to look at share prices," Matthew Vaight, a portfolio manager at M&G Investments told The Wall Street Journal in a July 10 story.

"The June selloff reflects an inevitable outcome of the remarkably high stock-return volatility that the Chinese stock market exhibits," Andrew Karolyi, a finance professor at Cornell University and author of Cracking the Emerging Markets Enigma (Oxford University Press, June 2015), wrote to China Daily in an e-mail. "Profit-taking is undoubtedly one of the factors, as is the expansion of shadow margin lending.

"But I think the more fundamental factors underlying the high volatility is lack of corporate transparency and the stringent restrictions on foreign institutional investor presence," he added. "The one-two punch of these two factors most importantly impede the depth, vibrancy and ultimately the resilience of the markets to macro news shocks. There is too little discussion in policy circles about these factors relative to the other less important, more transitory factors."

Margin buying (borrowing money to purchase shares) in China has slowed recently.

Investors cut margin buying by a third after a slew of margin calls (brokerages looking for their money back) and panic selling knocked shares down by more than 30 percent since mid-June. Margin debt was recently at its lowest level in four months, 810 billion yuan ($130.4 billion) down from its June 18 peak of 2.27 trillion yuan, according to wsj.com.

New margin financing as a percentage of daily share turnover fell from 19.2 percent in February to 5 percent on July 8, the lowest level in a year, according to Wind, a financial data service.

The fall in margin debt could be a reason for the July 9 rally, which sent the Shanghai Composite up 5.8 percent and pushed Hong Kong's Hang Seng Index 3.7 percent higher. The amount of margin financing recently fell for 13 consecutive days, The Wall Street Journal reported.

In the past 12 months, the Shanghai Stock Exchange Composite Index is up 87.8 percent. But the meltdown that started on June 12 has trimmed year-to-date gains to 19.2 percent.

The price-to-earnings ratio (stock price divided by earnings per share) on the Shanghai is 18.8, which is pretty remarkable considering the outsize rally the past year. By comparison, the S&P 500 P/E ratio in the US is a little under 21. (The higher the ratio, the more investors have to pay for those earnings).

On the Shenzhen Stock Exchange Composite Index, the 12-month return is 87.2 percent, up 46.1 percent year to date. Shenzhen-listed stocks trade at a pricey P/E ratio of 45.5.

The Hang Seng, which didn't see the heated action that the mainland did, is up 9.9 percent over the past 12 months and 8.5 percent year to date. Compared with the mainland indices, Hong Kong-listed stocks are relatively cheap on a P/E basis of 10.8.

The Chinese government has taken stringent measures to stanch the selling, such as limiting trading in more than a thousand companies, restricting insider selling, banning short-selling, cutting interest rates, setting up a broker-funded yuan-stabilization fund and suspending initial public offerings.

"Many of the government's specific actions — including the support of margin lending of the large brokerage firms, the temporary IPO moratorium, and the lowered interest rates to facilitate greater liquidity — exacerbate the already high levels of volatility," Karolyi said. "The actions, and especially the unpredictability of these actions, deter the active participation of long-term-focused investors that can help stabilize the markets in response to macro news shocks."

Experts interviewed by the Journal see most of the selling coming from those retail investors, not institutions. The pros look at China and see a viable stock market, because even with its massive economy easing up, it is still expanding by 7 percent.

"China is still growing at a good pace, and we believe it's an important global market that we want to have exposure to for the long term," Mark Mobius, executive chairman at Templeton Emerging Markets Group, blogged on July 9. "It's still a very big, fast-growing economy, and we believe in the merits of investing in equities in China. If we can do so at a lower price, so much the better."

China's stock market value as a percentage of GDP is only around 60 percent, according to Bloomberg.com, although it did reach 100 percent before the June selloff. But compared with the United States (around 140 percent of GDP) and Japan (around 120 percent), the stock market isn't as much of an economic pillar for China.

Karolyi, though, is concerned that volatility in financial markets can affect a nation's economy.

"High levels of stock market volatility reflect the absence of a resilient financial sector, so I do worry about its fallout in terms of slowing China's long-term economic growth plans," he wrote.

JPMorgan Chase CEO Jamie Dimon, speaking Tuesday about his investment bank's quarterly earnings report, said concern about China was overstated.

Dimon said "you've got to look and plan for the long run. You can argue whether [the government] should have gotten that involved in the stock market. But they still seem very committed to more and more market reform."

Emotion will always play a part in markets. How investors see the future is crucial, and if all the stories about middle class growth hold true, then China's stock market should stabilize.

Contact the writer at [email protected].