When a bubble forms

But how to tell a bubble is forming in the market? Sean Darby, chief strategist on Asia and emerging markets for Nomura, a Japan-based financial services group, said he would refer to some relative scales.

"As former US Federal Reserve Chairman Greenspan mentioned, it is always very hard to know when a bubble is forming. All you can do is to look at relative measures of wealth," Darby said.

It is worthwhile looking at affordability - the number of years it would take in average income to pay for a property, he said.

The method is also applied to the stock market. For example, people might look at the price you pay today and how many years you would be repaid based on the company's earnings, he said.

"Generally, you should never ever pay more than your own human life in terms of investment - for example, 20 or 25 years," Darby said.

"Right now people are staying clear-minded, (so the stock market) is still healthy. I can see no bubble," Sun said.

He recalled the recent stock market bubble in China, which collapsed from more than 6,100 points in October 2007 to 1664.93 points last October.

Theoretically speaking, the bubble bursting should have had a big impact on the Chinese economy, but the negative influence turned out to be limited.

Banks and enterprises remained sound. Ordinary people had been hurt a little, as they were the main force dealing stocks, but no big problems were reported, he said.

"The reason was that few people or enterprises borrowed money to play in the stock market. So the leverage ratio was low," he said.

"To be frank, people are talking about bubbles or valuation now, and that indicates they are still quite rational," Sun said.

But the real question, he added, is whether people's confidence might become irrational if the economy remains strong or even turns hot next year.

"Just like 2007, people argued a bubble when the index reached 3,000 points, but said it would soar to 8,000 points when the index was around 5,000 to 6,000 points," Sun said.

When asset prices keep growing, as Sun has predicted, confidence might swell among enterprises, households and banks.

That means when the bubble blows out this time, the outcome can be very different.

(China Daily September 14, 2009)