Is it a bubble or isn't it? That's the question coming to trouble analysts and investors watching the Chinese stock markets.
With the Shanghai Composite swelling by around 68 percent this year, fears of an asset bubble bursting is already doing the rounds — the nervousness fed by the maddening 73 per cent increase in property sales in the first nine months of the year.
Ironically, it is the Chinese panacea for the recession which has led them into a bubble trap. Excess liquidity in the market is now being touted as an evil.
Since the beginning of the year, the government has used its enviable control over the banks to unleash a massive increase in lending. New loans in the first three quarters stood at 8.6 trillion yuan (Dh4.6 trillion), which is 149 per cent higher than last year. This could go up to 10 trillion yuan by the end of the fourth quarter.
Also, banks could continue to make loans of more than 10 trillion each year in 2010 and 2011 to reinvest in projects activated by its stimulus plan.
This giant investment programme is now raising concerns. The banks almost went on a lending binge to ward off recession and initiate torrid economic growth. While a lot of the money is going into infrastructure spending, the massive liquidity is inevitably inflating the stock market, the commodity markets and the property markets.
Tomo Kinoshita, an economist at Nomura International, said in a report last week that China risked creating an asset bubble if it continued with its aggressive lending.
There is now a "speculative frenzy" in Chinese assets. Already, expensive Chinese real estate has continued to rise at a rapid rate.
In Shanghai's dazzlingly new Pudong area, row upon row of well-manicured housing complexes wear an eerily empty look. But apartment owners like Jiu Feng are not worried that their properties are lying empty. They have seen a mind-boggling appreciation of their flats in the past year, never mind the fact they haven't been able to get tenants for these.
Latest statistics show that housing prices in China's 70 major cities grew one per cent in July from a year earlier — the biggest increase over nine months. China's property sales surged 60 per cent by value in the first seven months.
While property owners are smug about the recovery in the real estate sector, government officials worry that prices are rising too quickly, luring speculators into the market and turning it into an asset bubble — which is certainly not an economic driver.
One person who has only tough words for China's market boom is former Morgan Stanley analyst Andy Xie. In his blog, Xie writes: "Chinese stock and property markets have bubbled up again. It was fuelled by bank lending and inflation fear. I think that Chinese stocks and properties are 50 to 100 per cent overvalued. The odds are that both will adjust in the fourth quarter.
"However, both might flare up again sometime next year. Fluctuating within a long bubble could be the dominant trend for the foreseeable future."
Xie has often courted controversy by spoiling the China party.
He has infamously slammed the Chinese asset markets as a giant Ponzi scheme. According to Xie, share prices in China are supported by an "appreciation expectation".
"As more people and liquidity are sucked in, the resulting surging prices validate the expectation, which prompts more people to join the party. This sort of bubble ends when there isn't enough liquidity to feed the beast."
Xie describes the peculiarity of the China market by the term "Panda Put," where investors believe that the government will not allow the stock market to go down before important dates like the National Holidays in October.
The idea that the government wouldn't let the market drop is deeply rooted in Chinese market psychology.
Despite Xie's scorn, there is some merit in this popular belief.
The government in Beijing is ever ready to tweak its liquidity policy if it finds the markets on a dangerous edge. Qin Xiao, chairman of China Merchants, said in a statement that China needs an urgent tightening of monetary policy to prevent the huge stimulus measures introduced this year from inflating stock and property bubbles.
But for now, the Chinese markets are in a frenzy. Young inexperienced retail investors are being sucked into it. Like Cicy Xie, 28, who works as a movie producer in Beijing.
This sprightly girl feels a bit sheepish after losing her hard-earned money in buying shares of a container company in the recession months. But this hasn't dampened her new found enthusiasm for the market.
Will the paternalistic government in China save her from the bubble?
- The columnist is a freelance writer based in Shanghai, China