By Zhuo Xian, Department of Development Strategy and Regional Economy of DRC

Research Report No 73, 2015 (Total 4758)

Abstract:

Economic bubbles give expression to the deviation of asset price from the value of stocks and real property. Those bubbles in an economic transition period are triggered by the allocation of a large number of capitals made by various entities in asset areas with short-term added values and driven by inertial thinking in high growth period. Proper bubbles with a productive nature help the aggregation of resources in the field of new technology, new industry and new business models, which is good for the promotion of innovation. However, speculative bubbles are utterly brought about by the speculations in the trade market, sending false price signals to factors such as labor, land and capital, which is pernicious for economic transition. Market entities tend to invest on assets with high risks as well as high rewards in an economic entity full of speculative bubbles. Consequently, the normal investments and innovations are critically suppressed in the real economy, leading to industrial hollowing-out and asset virtualization. Indication of speculative bubbles has already surfaced in China. Hence to avoid the bubble economy, the coordination of financial regulation should be enhanced in the short run while in the long run, a diversified financial system of homogeneity should be established.