Ten years ago, people who wanted a proxy for the state of the American economy tracked the Nasdaq. Today, investors are watching the Shanghai Stock Exchange for a read on China. They weren't right then, and they aren't now.

When the Shanghai market fell by 8.8 percent in February, markets in New York responded with their biggest one-day percentage declines since the September 2001 attacks. Other global markets also fell.

While that certainly won't be the last time goings-on in the Shanghai bourse reverberate in our backyard, it's a lousy way for outsiders to gauge the health of the Chinese economy—just as the bonus pool at Goldman Sachs is no indication of how things are going in most of the American economy. "It was made very clear to me how stupid foreign investors were," says Fraser Howie, co-author of Privatizing China: Inside China's Stock Markets, referring to the sudden dip in the Shanghai exchange.

The disconnect between the Chinese market and the real economy is profound: Between 2001 and 2005, as China's economy surged, its main stock market tanked. It was only in 2006 that the market rebounded, rising a bubbly 130 percent. "The market doesn't always respond to fundamentals," says Andy Rothman, who works in Shanghai as China macro-strategist for CLSA, a brokerage focusing on Asian markets. "It's kind of fake."

Created in the early 1990s, the Shanghai and Shenzhen exchanges were initially intended to help government-owned companies raise cash. Today, not much has changed—large state-controlled banks, steelmakers, and energy groups still compose the bulk of China's $1.4 trillion total market capitalization.

Despite stock reforms begun in late 2005, a significant portion of Chinese shares held by the government aren't tradable. Though that is gradually being reformed, the bulk of those shares won't be publicly available until after 2008.

Even when that happens, private companies will remain the drivers of economic growth in China. They now account for more than two-thirds of China's gross domestic product and create most of its new jobs—making stock market swings a naive way to look at the health of China Inc. "China's stock market is so disconnected from the real economy," says Jason Kindopp, China analyst and director for Asia at Eurasia Group, a political-risk consultancy. "The assumption should be that if China's market is going to tumble, then China's economy is going to tumble. That would be the logical case to be made. The problem with that is China's stock market is neither a leading nor a lagging indicator."

Government regulations add another layer of unreality. Beijing regulates the flow of initial public offerings to keep the market rising, and it limits foreign investors to a nominal $10 billion of the total market cap, though rumors frequently circulate that this will be expanded. Chinese investors, many of them new to the markets, pour cash into equities, sometimes buying a stock simply because its name has been mentioned in the state-controlled media, even if the news is bad. "They're in it to make money in the short term," Howie says. "They're just looking at this as a pure casino play."

So if connecting the Chinese economy and stock market is a mistake, what should investors interested in China watch instead? Frank Song, director of the Center for China Financial Research at the University of Hong Kong, says changes in China's G.D.P. and monetary policy are better indicators. CLSA's Rothman argues that power-generation statistics and changes in corporate profits are good yardsticks.

Chinese retail investors are slowly maturing, investing more money in mutual funds instead of individual stocks and adopting a longer-term perspective. But it will take years to change the way China's stock markets work, not least because officials fear some reforms could temporarily increase volatility.

The Shanghai exchange, in the city's Pudong financial district, is housed in a modern glass-and-aluminum building shaped like a bridge. Traders sit in narrow, tidy rows, facing computer terminals on Asia's largest trading floor—a model of restraint compared to the frenzy of the New York Stock Exchange.

In terms of trading, though, the exchange recalls the hairiest days of the dotcom boom. As a result, international investors should brace themselves for a bumpy ride and more days like the one that hit markets this spring.