THE slowdown in China’s property market has been cruel to makers of wooden flooring. After double-digit growth for much of the past decade, sales have slumped. Kemian Wood Industry, which used to boast of the quality of its composite floorboards, took radical steps to deal with the downturn. It switched its focus to online gaming and changed its name. After its rechristening as Zeus Entertainment in early March, its share price doubled in short order. This past week, though, its transition plan hit a snag. CCTV, the state broadcaster, accused it of being one of a series of companies that are “fabricating themes and telling stories” to inflate their share prices.

Zeus Entertainment denies the allegations. But the wider trend is clear. At least 80 listed Chinese firms changed names in the first five months of this year. A hotel group rebranded itself as a high-speed rail company, a fireworks maker as a peer-to-peer lender and a ceramics specialist as a clean-energy group. Their reinventions as high-tech companies appear to have less to do with the gradual rebalancing of China’s economy than with the mania sweeping its stockmarket.

The Shenzhen Composite Index, which is full of tech companies, has nearly tripled over the past year. Even frothier is ChiNext, a board for startups that is now valued at 140 times last year’s earnings (see chart 1). A multiple of 50 would already be very optimistic for even the whizziest firms. ChiNext is supposed to be China’s answer to NASDAQ. It does indeed closely resemble NASDAQ—but as it was in 1999, just before the dotcom bubble went pop. There is no telling when the Chinese frenzy will end, but a sharp correction seems inevitable. Such a reversal would cast a long shadow over China’s economy.

As in any bubbly market, there is a debate about just how inflated Chinese stock prices are. The average price-earnings (PE) ratio on the Shanghai Stock Exchange, home to the country’s biggest firms, is 23—lofty but not much higher than America’s S&P 500 share index. That, however, is a skewed picture. Banks have the heaviest weighting on the Shanghai exchange and they have been largely left behind by the rally. (That is a warning sign in itself since bank shares tend to track the broader economy.) The median share in Shanghai now has a PE of 75. Chen Jiahe of Cinda Securities, a brokerage, calculates that nearly 85% of listed companies have higher valuations today than at the height of China’s stock bubble in 2007—which ended in a big bust. Global investors are not buying into the mania: the shares of companies listed in both Hong Kong and Shanghai are now 30% more expensive in the latter.

Examples of excess abound. A pet-food company trades on 221 times earnings, a sauna-maker on 285 and a manufacturer of fans on 732. Chinese stocks have long had a tenuous relationship with economic reality, but the current rally has gone to new extremes. Growth in the first quarter fell to 7% year on year, the weakest figure since 2009. And monthly data suggest that the slowdown has deepened in the second quarter. But stocks are still racing ahead (see chart 3). Almost 8m brokerage accounts were opened in the first quarter of 2015 alone (see chart 4). A shift to monetary easing and fiscal stimulus—and expectations of more to come—help explain why the rally began. But the longer it continues, the more it looks like irrational exuberance.

One common view about the bull run is that the government is behind it, and could bring it to a halt if it chose, just like flipping a switch. The truth is that even the Communist Party, though powerful, struggles to steer the stockmarket along its desired path. Official media did talk up shares as “cheap” in the early days of the rally, but the government had tried for years without success to breathe life into the previously torpid market, cutting stock-trading taxes and freezing new listings to limit the supply of shares. In recent weeks the balance of official rhetoric has started to turn against the market, highlighting the growing risks. The report by CCTV about companies “telling stories” followed a vow by the securities regulator to crack down on market manipulation. “It’s like crying wolf. Because there have been repeat warnings but few serious consequences, investors pay even less attention,” says Shao Yu of Orient Securities, a brokerage.

If the bubble does burst, it would undoubtedly hurt the Chinese economy. Leverage has played a big part in the rally: margin financing for share purchases has increased five-fold over the past year to more than 2 trillion yuan ($325 billion; see chart 2). Debt has also worked its way into the market through other channels such as “umbrella trusts”, which used to allow banks to lend to wealthy investors without encumbering their balance-sheets. Credit Suisse estimates that 6-9% of China’s market capitalisation is funded by credit, nearly five times the average in the rich world.

The presence of so much leverage means that the eventual correction is likely to be sharp as investors race to repay loans. This is new territory for China. When its last bubble burst in 2007, the government had yet to allow margin financing. “Now, the odds are that it will inflict a much bigger loss on households,” says Helen Qiao of Morgan Stanley, a bank.

Nevertheless, the immediate damage from a crash should be manageable for China. The free-float capitalisation of the stockmarket is just about 40% of GDP; in rich countries it is typically more than 100%. ChiNext accounts for less than a tenth of GDP. Moreover, the rally has been less helpful for the economy than often imagined. A sustained slowdown in retail sales indicates that there has been little positive wealth effect from rising share prices. Some households may have even held off from buying things to put more into the market. The corollary is that a market tumble need not spell too much gloom, at least in the short term.

The longer-term repercussions of the mania are more worrisome. After the 2007 crash, investors lost faith in China’s stockmarket for years. Equity issuance slowed to a crawl. Companies had little choice but to tap banks for funding, one of the reasons why Chinese debt levels soared from 150% of GDP in 2008 to more than 250% today. Many hoped that the current rally would put China’s financial system on a better footing by allowing companies to raise more cash through equities and reduce their reliance on debt. This is only beginning: share issuance is stronger this year but still accounts for just 4% of corporate financing. If the rally turns to rout, it would undermine that shift. “Regulators want a slow bull market,” says Larry Hu of Macquarie Securities. Instead, they have a raging beast.