The current credit crunch that stemmed from the U.S. subprime mortgage market seems to not have affected the Chinese market or the psyches of the Chinese investors. China’s Shanghai Composite Index (SCI) reached a record high at 5107.7 on Friday, jumping 91 percent year-to-date, while in the U.S., the rippling effect has forced mortgage companies and hedge funds to close down, the Federal Reserve to cut discount rate, and the stock market to reach the highest level of volatility for years.

China’s two biggest banks, Bank of China and Industrial & Commercial Bank of China disclosed that they held $9.65 billion and $1.23 billion U.S. subprime mortgage-backed securities respectively. However, the two companies’ Shanghai stock prices (both are duel-listed in Shanghai and Hong Kong) jumped 7% and 8% during the last week.

While fear of further turbulence in the U.S. market persists, it is tempting to think that the health of economies and financial markets across the Pacific Ocean are uncorrelated, or “decoupled.” But there is evidence pointing to the contrary. For example, in February, the Dow Average dropped 3.3% triggered by a Shanghai market sell-off (though there is controversy as to whether the two events are related and how much a causal effect is there).

Judging from market fundamentals, the interdependence between Chinese and U.S. financial markets has yet to be proven.

First of all, to a large degree, China’s stock market remains a fenced-up territory. Outside individual investors cannot directly invest in China, and Chinese investors cannot directly invest in overseas market. For institutional investors, those outside of China can participate in China’s market only through government approved institutions that have “Qualified Foreign Institutional Investors” (QFII) status. Reversely, Chinese investors can invest in non-Chinese securities only through “Qualified Domestic Institutional Investors” (QDII).

Moreover, the amount of money that can flow in and out of China through investment is small, and is subjected to government quota. This year, a maximum of $77.7 billion can be invested by Chinese institutional investors (banks, insurers, mutual funds, brokers, trust companies and national social security funds) to non-Chinese securities through QDII, according to Morgan Stanley Research, while the quota for QFII to buy Chinese securities is $10 billion, according to Bloomberg. That is only a fraction to, say, the $200 billion under management by China’s newly founded State Investment Company.

Not only the flow of money is restricted, sentiment seems hard to transmit. Partially, it is because China’s exposure to U.S. subprime-backed securities is limited. Bank of China’s $9.65 billion in subprime-backed securities accounts for only 3.8% of its total securities investment, and Industrial & Commercial Bank of China’s $1.23 billion is only 0.3% of its total securities investment. At the same time, the unaffected Chinese investor enthusiasm is inexplicable: as the Wall Street Journal reported, Chinese investors use numerology to direct investment and reported company loss sent stock price higher – these are simply mystic and beyond rational analysis. But the point is that sentiment that transmits to other markets seems to hit an impenetrable wall in China.

Secondly, China’s financial market is still a preliminary market, lacking certain instruments that are widely used by mature markets. Henry Kaufman in his column “Our Risky New Financial Markets” in the New York Times points out how complicated the market and its products have become: “Traditional credit instruments such as stocks, bonds and money-market obligations have been joined by a long and diverse roster of new obligations, many of them extraordinarily complicated. Along with the arcane tranches of mortgages that recently garnered attention are a myriad of financial derivatives, ranging from those traded on exchanges to tailor-made products for the over-the-counter market.”

China’s market is almost two-levels down. By that I mean, not only the “diverse roster of new obligations” and “a myriad of financial derivatives” are barely present, the base of these securities – bonds and stocks – needs to be further developed. For example, the Chinese corporate bonds market is in its preliminary stage and even government bonds are not issued frequent enough and in a wide range of maturities to provide a basis interest rate.

Moreover, the vehicles that facilitate the trading of these complicated securities – hedge funds, pension funds, insurance companies, endowment funds – are either just emerging in China or are subjected to regulatory restraints. In the U.S., hedge funds industry has 1.8 trillion under management in the first quarter, according to Barclay Hedge. While in China, the industry is just beginning to develop.

Without these products and market participants, China lacks the basis to be “coupled” with mature markets. So it looks, at least by now, the financial markets across the Pacific have a long way to tie the knot.