Another point is, the stock market has become the only market that everybody can participate in simultaneously throughout China. Many commodities, like clothing, food, and electric appliances, are sold nation-wide, but their prices are unlikely to fluctuate nation-wide at a same time. In comparison, if there is a slump in the stocks, all participants perceive their losses simultaneously. Especially when Chinese investors can buy stocks on margin but not sell them on margin, it’s only possible that everybody loses money together when bubbles pop.

Of course no one hopes to see such a result. So how do we avoid it?

Above all, the yuan should rise as quickly as possible so that people won’t be so sure of its 5 percent per year appreciation. In this way, hot money will lose its power, trade surpluses will ease, foreign exchange will fall, and liquidity will shrink. Secondly, interest rates should ascend faster so that savings accounts can at least attract some people, which, to some extent, will helps ease the pressure in the real estate and stock market. Besides, the government should take the golden chance of a flourishing stock market to introduce a shorting mechanism, which will certainly guide stock prices to a more reasonable level, and improve the quality of the stock market. Moreover, access to market listings should be completely open to private enterprises. By this, not only will stock supplies increase, but stocks will truly be a true channel for social innovation.

(The author is a professor on financial economics at Yale University, and a visiting professor of Cheung Kong Graduate School of Business）