Since the Shanghai Composite Index surpassed its benchmark of 4,000, the gravity-defying rise of Chinese stocks seems unstoppable now.

 

But policymakers should not take it as such.

 

In face of the emerging market bubble, verbal warnings are not enough. The authorities must come up with concrete measures to convince investors of the dangers they see in the market and demonstrate their resolve to deal with it.

 

Shanghai's stock index closed at 4,013 points yesterday, well above the psychologically important barrier of 4,000. That means another 50-percent gain so far this year, on top of a 130 percent rally last year.

 

The improved profitability of listed companies and the rosy growth prospects of the Chinese economy lend some credit to the rally of A-share equities.

 

The net profits that listed companies made in the first quarter this year almost doubled over the same period last year. Meanwhile, the country is heading towards its fifth consecutive year of double-digit growth.

 

But such improvements in fundamentals fall far short of justifying the phenomenal rise in the price of Chinese shares.

 

In fact, the domestic stock markets are still liquidity-driven.

 

The market has shrugged off a central bank warning about the danger of an asset bubble and went on to hit a new record high this week. A key reason behind this is that an influx of investor cash after China's week-long May Day holiday has further pushed up share prices.

 

Obviously, a growing number of Chinese are pulling their money out of saving accounts and sinking it into the stock market.

 

If the authorities' concern over the market danger is serious enough, they may have to take preemptive actions to deflate the bubble now.

 

Chinese policymakers have necessarily learned to refrain from directly intervening in the market. A faith in the market's ability of self-correction is crucial to the long-term development of China's stock markets.

 

However, that does not mean that policymakers need not take any action beyond talking about the danger they have seen, especially when the root cause actually lies beyond the market.

 

When almost everyone is making money in the market, it is certainly unpopular to talk about the bubble, not to mention to prick it. But that is a tough choice responsible policymakers must make. And they must make it in a timely fashion.

 

(China Daily May 10, 2007)