Some economists of foreign investment banks are calling on the government to take active measures to pierce the stock market bubble, warning that China will otherwise sink into a long recession with economic growth possibly declining from 12 percent to 8 percent.
Amidst fear that the real economy would be damaged in the wake of market fallout, these cries have intensified following the Shanghai Index's rise to nearly 6,000 points. But any such slump would bring severe social consequence since many of the new stockholders are elderly and are relying on their pensions and savings.
Most market watchers agree that the Chinese asset bubble is expanding. But there is disagreement over what stage the bubble is in and whether or not it is on the brink of bursting. With more than 200 thousand investors opening accounts in the stock market every day, this puts high level policymakers in a tough position.
The real problem is whether China can renew stock market development after any interfering measures. Several years ago, economists were questioning whether the Chinese stock market could be jumpstarted after touching down.
While government intervention in the market seems to be a sound solution, it is very difficult in practice because the scope of the bubble is unknown and clear policy targets difficult to imagine. Proper intervention policy necessitates studying the cause and evolution of bubbles so that we can find specific ways to solve the problems.
China's asset bubble is not unique to it. Capital prices in Russia, Brazil, India and China have made rapid increases. In the context of global excess liquidity, developing countries share the same symptoms of overheating stock markets. Given systemic nature of asset bubbles, it is clear that intervention alone is not enough.
China's economy has enjoyed high growth for 30 years. As a result, the increasing of wealth will inevitably lead to asset revaluation, and here a yuan appreciation is also rational. To some extent, this is a natural course for fledgling economies. But it also doesn't forgive excessive tolerance for or ignorance over them.
With asset price increases, inflationary pressure also builds, and China risks falling into the same disastrous track that Japan did. We support mild, holistic measures— much like Chinese traditional medicine, which not only emphasizes treatment but also conditioning and balance. There is no panacea to bubbles.