Bubbles in the stock market are the biggest social and economical risk in the coming years.

The direct and indirect support from stock and securities departments in the past years, the decreasing interest rate, the lowering return in the real-estate sector and foreign investment, all these factors make the stock market a good choice for surplus funds. As most surplus funds go to the stock market, bubbles will emerge. The average price-earnings ratio is now around 60. If the irregular, and non-core security income (which counts for 25% of the price earning ratio of listed companies) are excluded, and the core revenue is counted, the PE ratio will reach 80, close to the recorded 100 in the 1990 Japan Stock Market. The stock bubbles are becoming distinct. Up to now, more than 120 million accounts have been opened, and people young and old are all pouring to the stock market, making it phenomenon of national proportions.

Why are stock bubbles the biggest economical and social risk in China in the coming years? Some years ago, scholars predict that bad accounts in the bank may finally put an end to the rapid growth in China and lead to a financial crisis. However, the banking system still remains in good shape and the economy continues to grow, leaving one wondering if there is any difference between the stock bubbles and the bad bank accounts of before?  We can find the answer from the following three aspects:

First, we can not see the bad debts in domestic banks from the standard view of market economy.

As the banks in China are mostly state owned, no matter how high the bad account rate is, as long as the state finance is good, there is no need to panic about banks going under, and thus no possibility for a financial crisis. In other words, in the state controlled system, there is no bank bad accounts problem in the market economy theory, there is only problem for the state finance. In fact, in 2002, the official figure for the bad accounts was 25%, counter that with Standard & Poor's figure of 50%.  However, the figure decreased to 6.6% percent thanks to funds from the state treasury and foreign exchange. Isn’t it wonderful that banks are always safe under the shelter of a sound state treasury? Why not just let them remain as state owned banks, why bother introducing commercial reforms? When the government tries to pull them out of trouble, it’s sacrificing funds for social securities, retirement insurance, education, health care and farmers.

Second, what’s China is going through at the moment is similar to what the US did in years around 1929. Before the recession in the 1930s, Americans were not economically secured at all. On the one hand, the government hadn’t established any form of social securities, public securities, pensions or health care securities. Any need for such insurances could only be satisfied by citizen-managed insurance businesses. On the other, the industrial revolution and urbanization the country had been through during the 19th century spurred Americans to leave suburbs and their families, making them financially independent of them. All this had contributed to the severe blow to the American society when the disaster in the stock market broke out. The several crises the country faced later were milder as the social securities system was established during the worst of the recessions. China today is like the US in 1929 in that there are bubbles, but no well-developed social securities systems. There is a massive floating population, but no reliable financial backups. Individuals and families won’t be more immune from a nation-wide financial crisis than those US ones in 1929 if it really comes.