GIVEN THE DEMOGRAPHICS, IT'S NOTHING BUT BUBBLE:

Great Speculations: Why China Is So Bubble-Friendly (Adam Wolfe, 04.07.11, Forbes)

First, decades of financial repression have resulted in the broad money supply (M2) expanding to 182% of GDP, providing a massive pool of potential liquidity for speculation, while negative real interest rates on deposits encourage savers to seek alternatives. There are sufficient monetary assets to fund a bubble of stupendous magnitude; no excessive loosening is required. From the end of Q3 2006 to its peak in October 2007, the Shanghai Composite Index increased 230%. In the preceding six quarters, M2 growth outpaced nominal GDP growth by less than a percentage point. It was the velocity of money that spiked, not the quantity. Velocity is more difficult for the People's Bank of China to control, especially with banks' required reserve ratios already at record highs, and current conditions seem ripe for a bubble.

Second, the Communist Party of China's dominance over the press, even independent sources, results in low trust of official information, counteracting their ability to dispel unfounded speculative manias. At the same time, heavy reliance on social networks, guanxi, results in an abnormal amount of inside information sharing, and thus speculative opportunities. Positive feedback loops proliferate as investors pile into the same opportunities and bid prices up.

Third, the government's interference in price-setting distorts markets, creating potentially huge divergences from equilibrium. From vegetables to apartments, the government's efforts to control prices only shifts the adjustment burden to the supply side as markets seek equilibrium. This also creates a whack-a-mole game between speculators and the government as liquidity shifts from one asset class to another.

Fourth, "new era" thinking is epidemic in China, and this euphoria often spills over into asset price valuations as speculators discount historical benchmarks.

Many of these factors can be seen in the extraordinary salt mania of March 2011.

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