As far as the conventional wisdom goes, when it comes to the Chinese Market Bubble it's pretty simple--the high-flying market will be able to hold on at least until the end of the Beijing Summer games. That makes Chinese shares safe for the next 203 days, according to the theory.

The Chinese government, theory backers insist, would never by any means let their markets fall beforehand. The possibility of embarrassment in the eyes of those central planners trumps free markets any day.

If only it were that easy. But it's not.

Markets, truly free or even just sort of free, have a mind of their own. And over the long run, the markets always manage to get it right.

It was legendary investor Benjamin Graham who absolutely nailed it when he said, "In the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine"--that weight meaning value.

So while the Chinese government may be doing everything it can to keep the game going (sound familiar?) it won't be able to jawbone those stubborn fundamentals after all. "Mr. Market" simply won't allow it.

The Growing Chinese Market Bubble

But don't even try telling that to the "China Bulls." They insist that the Chinese markets can and will grow to the sky, citing China's amazing growth rates. The Shanghai Composite Index, they crow, is telling us something.

And in fact, since bottoming in the summer of 2005, the Shanghai has gone parabolic, gaining 483% from trough to peak.

But what the index is telling us has nothing to do with the incredible Chinese growth story. It goes far beyond that. Instead it is a tale of a massive speculative bubble.

Because not unlike our own NASDAQ bubble from the late 90s, speculators have pushed Chinese shares up too far, too fast.

Remember the day traders from the late 90s? China, not coincidentally, is full of them.

In fact, recent data show that the country's investor population surged to 136 million at the end of 2007. That's ten times the number of accounts from the previous year.

And it's nothing but the "easy money" from speculation that is fueling their ranks. According to reports, day traders there run the gamut and often earn 10 times their yearly salaries by betting on Chinese shares

And like those novice traders from the tech bubble, the Chinese scene is full of investors who have never been through a bear market. A full 10% of them, according to a recent survey, have never even considered the thought of losses.

But recent developments within the U.S. economy may be what finally brings them all back to reality and the "concept" of losses. A coming U.S recession will likely bring it all crashing down.

That's because the Chinese economy is far from "decoupled" from the U.S. after all, despite all of the hype to the contrary. In short, we're still joined at the hip.

Take a look the five-year charts from both the Dow and Shanghai Composite:

As you can see, the big upturn in the Shanghai comes only after the Dow began its climb in late 2005. Speculation, meanwhile, pushed it even higher to its current bubble heights.

Before hand, of course, the Shanghai markets were practically a non-issue. As the Dow trended sideways between 2004-2006 they were actually mired in a downtrend-falling 43%.

An America suddenly turned cold could bury them again, since they are not nearly as decoupled as they hoped they were.

In fact, just two months ago China's Commerce Ministry admitted as much when it warned that a slowing US economy would trigger a drop in exports that would mark a "turning point" for China's economic growth.

"If demand in the US drops further, Chinese exporters will be devastated by a rapid and continuous fall in orders," according to the report, written by the Chinese ministry's policy research department and published on the ministry's website.

So with the Chinese markets in full bubble mode and the U.S. economy apparently headed for a recession, it's not very likely that the government can keep the markets propped up there for much longer--Olympics or not.

Earning Profits Shorting the Bubble

But because Chinese markets have largely outlawed short selling--another major flaw--bets against the Chinese bubble are limited, outside of shorting individual Chinese ADR's trading on U.S. exchanges. Baidu.com. (ADR) (Nasdaq:BIDU ) is one that comes to mind.

Nonetheless, here's two ways to turn a profit when the bubble there pops. In fact, it has already practically begun as the Dow heads lower.

• Go short the Morgan Stanley China A Share Fund, Inc. (NYSE: CAF). The $1.1 billion Morgan Stanley China ETF is the only US ETF that primarily invests directly in Chinese companies. It's down 34% since September.
• Go long the UltraShort FTSE/Xinhua China 25 Proshare ETF (AMEX: FXP). Introduced in November, it's designed to go up as China falls. Shares of the ETF rose 15% on Tuesday on three times their normal volume as recession fears sent the Dow below 12,500.

So as we head down our own bumpy road, we will hardly be alone. China will be joining us, and when they do, their markets will surely follow.

By the way, here's something else that Benjamin Graham once said --"Wall Street people learn nothing and forget everything."

Smart guy Graham.

Wishing you happiness, health, and wealth,

Steve Christ, Editor