This excessive demand for an experimental market validated one thing: More demand was to come. This situation was the basis for the bull market of 1996-2001 (see "Early run"). The general public demanded stocks — any stock they could get hold of. The exuberance was countered by under-performing earnings and governmental efforts to counter the market emotion. These two forces formed the up and down mini-cycles within the bull market.
During this bull cycle, the market went from a broad-market index level of around 500 to a peak of 2200 in June 2001. The GDP grew by 54%. The market outperformed GDP.
The opposite was true for the ensuing bear market (June 2001- July 2005). The market was halved by July 2005. During the same period, GDP grew by 67%.
This leg had the following features:
- The industry was not mature: Investors were surprised by security law violations; executives of brokerages were found embezzling client funds; mutual funds were found ghost trading with each other and portfolio documentation did not reflect true holdings.
- The market was not mature: The Chinese government was slow with the IPO pipeline. More importantly, state enterprises were not open to the public. Investors did not get the right instruments for the upside of the growing economy.
- Further shocking news was that investors found that in aggregate they were minority owners of the stock they bought. Majority ownership was represented by non-circulating shares held by the government and management. The majority owners were waiting in the shadow for the expiration of the non-circulating period.
- When they were floated on the market, these non-circulating shares almost brought the stock index below 1000 and the government had to put forward a combination of measures to save it. It is hard to ascertain which one of the measures addressed market concern. However, the market was supported at the 1000 level and the bull market subsequently resumed.