Excess liquidity and an overheating stock market have been the bane of policy-makers these past two weeks as they work to contain both phenomenon.

At midnight on May 29, fresh on the heels of insistence that the stamp tax would not be adjusted, the Ministry of Finance announced that the tax would be bumped from 0.1 to 0.3 percent. Before this week, the People's Bank of China had already opted to adjust the "three rates"-- the interest rate, exchange rate, and reserve ratio. At the same time, the China Securities Regulatory Commission (CSRC) has started prosecuting listed companies and senior managers for insider trading and other behavior.

It's a busy start. And now, some are drawing similarities between Japan of the 1980's and China today.

Excess liquidity, an uncontrollable bull market, red-hot investment, skyrocketing real estate prices, swelling debt-- are all reminiscent of Japan twenty years ago. Observers believe that several economic policy-making agencies have recently teamed up precisely to avoid what Japan fell victim to, and are taking seriously the threat that China could, as Japan had, lose ten years of hard work and progress.

As if awakening from a sound sleep, many investors are just realizing that the stamp tax has increased. On May 30, the Shanghai and Shenhen exchanges had increased by six percent-- but by Friday, the Shanghai Index had returned to 4,000 points.

The stamp tax has been adjusted before. On May 12 1997, the stamp tax increased from 0.3 percent to 0.5 percent. In the four months that followed, the market shrank 30 percent. Ma Jun, senior China economist for Deutsche Bank, says that if the stock market defies policy signals and continues its unsustainable speed, the stamp tax could still go up even further.

Intensive re-adjustment policy has been continuing for two weeks. And it's not just the central bank that has made unprecedented moves, the CSRC has released a series of hazard warnings and repeatedly called for responsible investing.

On May 14, Sinoma vice-president Chen Jianliang was fined 200,000 yuan for insider trading, and on the 29th, the CSRC announced fines for Senlingaodong and Yanbian Highway for violating regulation, also stating that they will continue to treat such cases severely.

But these seemingly heavy-handed measures may be as effective as fighting an ocean with fists.

On May 18, the central bank adjusted both the interest rate and reserve ratio while allowing the yuan to appreciate. But during the next trading day, after only a ten-minute hesitation, the market snapped back onto the bull track again. Since the beginning of this year, the central bank has already adjusted the reserve ratio five times and the interest rate twice.

As early as May 1, policy-makers had invited six well-regarded scholars to discuss China's stock market. One key question was whether or not the market was in a bubble. Although four of the scholars said no and two said yes, policy-makers still expressed concern.

Regarding the recent flurry of market activity, Xiao Weiqiang, a senior partner at Bimawei Accounting, tells the EO, "Chinese people are ignorant about investing. I'm worried that they are doing it to test fate, to gamble. Some people are putting together all of their family's funds, even friends' savings, and throwing it into the stock market, even mortgaging their houses to speculate."

Now, Chinese economists are making comparisons to Japan's crash.

An ever-climbing currency, flooding capital, speculation in securities and real estate, swelling asset prices, and a stock market that keeps breaking new heightsare all visible in China today as they were in Japan of the '80's. Of special significance are similarities between the appreciation of the yuan this year and the yen of that time.

In the mid 80's, the yen doubled in value against the dollar over a three-year period. Moreover, Japan was using loose monetary policy. As a record-breaking market became a bubble that eventually popped, Japan's economy slipped into a depression. Businesses closed their doors and financial institutions went bankrupt. Ten years of stagnation followed, now sometimes referred to as "the lost ten years."

In many aspects China's economy is reflecting this sequence of events. More than a years worth of tightening measures by the central bank has been unable to dissolve China's excess liquidity. Government statistics show that this year China's trade surplus may exceed 250 billion yuan. To maintain its stable exchange rate, it has had no choice but to buy up huge amounts of US dollars.

Since the implementation of the new exchange rate system, the yuan has already appreciated 5 percent. Market observers believe that this year, the yuan has yet to move up another five percent.

This indicates that the excess liquidity problem will not be solved easily. Furthermore, these kinds of exchange-rate predictions encourage more hot money to flow in.

Wei says that China is not guarding against a market bubble, but the bubbling of the whole economy. He believes that among other differences between the China's economy today and Japan's of the 1980's, the yen appreciated to a much greater degree than the yuan has, owing to the fact that the Chinese government has been controlling it cautiously.

However, Wei warns that if anything significant does happen, it will potentially be be far much worse given the fragility of the Chinese banking system today compared with the strength of the Japanese one then.

"The bubble will pop sooner or later," says Xu Jian, a researcher at the People's Bank of China. "If you don't poke it, it pops on its own. And the bigger it is, the more losses will be incurred when it inevitably does. Thus, the earlier we can stop it, the better."