Government policies have made China especially prone to asset bubbles. Even as some of those bubbles are carefully deflated, new ones are sure to emerge unless the policies themselves change.

The issue is surplus liquidity -- what's been described as China's "great ball of money," which bounces from asset class to asset class as if in a pinball machine. Even Chinese leaders acknowledge it was their effort to fend off the 2009 global financial crisis that allowed that pile of money to grow to epic proportions. By now, credit and money growth has far outstripped any good opportunities for investment in China's real economy, which is hobbled by excess capacity. And the mismatch is getting worse: Total social financing, China's broadest measure of lending, grew nearly four times as fast as nominal GDP last year.


Officials have also maintained their firm grip on the economy, thus encouraging investors to focus on government statements, rather than economic fundamentals, when deciding where to put their money... the only sure way for China to prevent new bubbles is to tighten credit, slow money growth and allow risk to price assets properly. If the government keeps stepping in to prevent falling prices and to bail out banks or other investors, the possibility of loss is discounted.

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