A man operates a stock trading terminal at a securities exchange firm in Shanghai. The Shanghai Composite Index rose 1.4 percent this month, sending the value of China's domestic stock market to $3.21 trillion.
China overtook Japan as the world's second-largest stock market by value for the first time in 18 months.
This month's change was attributed to government stimulus spending and record bank lending that boosted share prices this year.
The Shanghai Composite Index rose 1.4 percent this month, sending the value of China's domestic stock market to $3.21 trillion, compared with Japan's $3.20 trillion, according to data compiled by Bloomberg.
The Shanghai index has gained 75 percent this year, the best-performing major market, against a 7 percent advance in the Nikkei 225 Stock Average.
The US has the biggest equities market worth $10.8 trillion.
"China is just entering its stride and is still very much in a growth phase, while Japan is already a developed economy," said Daphne Roth, Singapore-based head of Asian equity research at ABN Amro Private Banking, which oversees about $14 billion.
China last surpassed Japan in stock market capitalization from Jan 4 to Jan 24, 2008, data compiled by Bloomberg show.
The Shanghai Composite tripled in the two years leading to its record on Oct 16, 2007, before tumbling 72 percent to its trough the following November.
A government-led 4 trillion yuan stimulus package and record bank lending have shielded the Chinese economy against a plunge in exports.
Foreign-exchange reserves topped $2 trillion for the first time, while its money supply rose a record 28.5 percent in June, the central bank said on July 15.
The economy expanded 7.9 percent in the second quarter, the statistics bureau said in Beijing, more than the 7.8 percent median estimate from 20 economists surveyed by Bloomberg News.
New loans rose fivefold in June from a year earlier to 1.53 trillion yuan, increasing concern that attempts to revive the world's third-largest economy will lead to bad debts and asset bubbles.
Rapid credit growth poses risks for lenders and the financial system, Wang Huaqing, the disciplinary secretary of the China Banking Regulatory Commission, said on July 7.
BNP Paribas Securities (Asia) Ltd last month cut its rating on China to "neutral" from "overweight", citing valuations.
Stocks on the benchmark index are trading at 33.2 times earnings. That's almost triple the 12.9 multiple on Nov 4, when the measure dropped to its lowest since the financial crisis.
Earnings per share declined 7 percent last year and will probably remain "flat" this year, the brokerage said.
Some Chinese shares have soared by "1,000 percent from the bottom, so they're pricing in a very strong rebound in earnings", he said.
In Japan, nagging deflation and an aging population have sapped strength from what was once the world's largest market by capitalization.
During the 1990s, Japan spent 135 trillion yen on 10 economic stimulus plans and lowered interest rates to zero, none of which succeeded in promoting sustainable growth.
Japan's economy shrank at a 14.2 percent annual rate in the first quarter, the most since data began in 1955.
The country's gross domestic output will shrink 3.4 percent in the year ending March 2010, the central bank predicted.
The contraction coincided with a drop to a more-than 25-year low by the Topix index.
"Japan has two main problems. The enormous public debt handicaps the government's ability to spend additional money to boost the economy, and we are too reliant on exports," said Takashi Kamiya, chief economist at T&D Asset Management Co in Tokyo, which helps oversee some $16 billion.
Chinese companies account for four of the 10 biggest companies when measured by market value, according to Bloomberg data.
Toyota Motor Corp is the top-ranked Japanese company, at 25th, worth about one-third the capitalization of PetroChina Co, ranked No 1.