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According to statistics from the People's Bank of China, Chinese residents' private savings slipped by 278.4 billion yuan in May, the biggest decline to date. Adding to the drop from April, this brings the total loss of personal savings to 445.8 billion yuan in just two months.

The central bank attributes the declines in private savings to two main causes. First, with personal income growing, Chinese people are more able to and increasingly willing to spend money on leisure items. Second, more importantly, the booming capital market is driving more and more Chinese to invest their money in stocks and funds.

Even the thriving global capital markets pale in comparison to the Chinese stock market, which has been soaring wildly over the past two years. In 2006, the Shenzhen and Shanghai stock indexes rose over 150 percent, and they increased another 50 percent from this January to May.

It took 18 months for the Shanghai composite index to jump from 1,000 points to 2,000 points; however, it only took 48 trading days to rise from 3,000 points to 4,000 points.

In order to squeeze these bubbles, relevant government departments took several measures. On May 18, for the first time, the central bank simultaneously raised both the required deposit reserve ratio and benchmark interest rate. On May 21, the first trading day after these measures were announced, the Shenzhen and Shanghai stock indexes dropped by 3 percent at the opening hour but rebounded back just half an hour later, setting several new records during the next few days.

Not until May 30 did the Shenzhen and Shanghai stock indexes suffer rare dramatic drops because the Ministry of Finance announced a rise in the stamp duty levied on stock purchases. Even then, they quickly recovered and rose to 4,200 points when the market got on its feet.

Swarms of private investors are the forces that keep pushing the stock market to consecutive highs. According to a report issued by Shenyin & Wanguo Securities Co. Ltd, private investors hold 62 percent of the whole market values in circulation, up from 52 percent. In April alone, the stock market absorbed 250 billion yuan worth of investments, over 70 percent of which came from individual investors' pockets.

Many theories have been given to explain the remarkable phenomenon of the stock market, such as: a trade surplus that causes excessive liquidity; long-term economic growth that makes listed companies more profitable; and, stock rights reform that solves interest conflicts between shareholders.

However, the essential reason for this boom is undoubtedly bubbles in the Chinese stock market. Based on the turnover of the listed companies in 2006, the average price-earnings ratio of the Shanghai and Shenzhen stock markets has reached 50, far more than that of the world's other major stock markets.

China has witnessed irrational stock market growth periodically over the past decade. Each time, the prospects of great profitability drive an increasing number of private investors into the stock market, resulting in an increasingly bullish market. The private investors should not be blamed for their inexperience and irrational crazes, and instead more attention should be paid to the defects in the current financial system. More effective measures should be taken to guide private investment and to prevent these investors from being victimized by a bubbly market.

(China.org. cn by Pang Li, June 21, 2007)