China is faced with a series of asset bubbles as a result of the huge amount of money invested by speculators on stocks, bonds and commodities, while government tries to control each bubble as it arises.
A report by The Wall Street Journal said that the surge in investment was driven by easy credit and government stimulus which increased volatility and caused prices to skyrocket then slide.
Aside from China's housing sector, which has the biggest bubble, prices for niche assets also increased, which included art, antiques and calligraphy. For futures, prices of commodities such as soybean meal also rose by 40 percent in May. This year, on the Dalian Commodity Exchange, the price of pipe-making material PVC rose by 40 percent.
According to the report, the huge supply of money came from the credit and fiscal stimuli provided by government, which resulted cash to circulate inside the country, with very limited number of opportunities to invest in.
"There are very few places left to invest in the real economy, so the money goes into the so-called virtual economy," Yang Delong, chief economist at First Seafront Fund Management Co., said. First Seafront has shifted toward bonds and commodities after cutting its stockholdings in the past year.
In May, an unidentified "authoritative person" told the state-run People's Daily in an interview that the country's credit must be managed properly otherwise it could lead to a systemic financial crisis, recession and the collapse of savings.
The risks of the asset bubble may have a global effect. Last year, iron-ore trading in China affected global prices and when the country's stock markets crashed, stock markets in Asia, Europe and the U.S. also fell.
The risks continue to grow due to speculative investments by banks, companies and investment banks while many consumers put their savings into high-return investment products.
In July, China's Politburo, made its first-ever reference to asset bubbles, which it said are the "risks and potential threats that deserve high attention".
The move came after property prices increased in many large Chinese cities. In Shenzhen, apartment prices jumped by about 47.5 percent, the highest increase in the world.
To control the sector, some Chinese cities imposed policies increasing downpayment requirements and limiting purchases.
According to an analyst at Goldman Sachs, the country's total debt this year is expected to hit about 260 percent of its gross domestic product. Its debt-to-GDP ratio has widened to about three times that of the U.S. before the 2008 financial crisis, the report said.
The country's debt problem began with the stimulus package given by government during the crisis. Public and corporate debt reached about $22 trillion as the Communist Party used credit to support some state-owned firms to meet their growth targets.
With so much cash in circulation, businesses invested from one asset type to the next. In 2015, when the stock market crashed, about $5 trillion, or 43 percent, of value in Chinese stocks were wiped out in a single blow. From June 2014 to June 2015, when the Shanghai market doubled, investors borrowed 2 trillion yuan ($300 billion) to buy stocks.
To manage the stock market, the government prohibited short selling and a team of government investors moved in to purchase beaten-up shares.
This has caused money to flow into bonds and many investors borrowed money using the bonds they own, repeating the process many times. The borrowing resulted in a growth 2.5 times the size of the $7 trillion bond market, analysts said.
Commodity speculation came next, which drove the prices of some products to go up. From January to April, the prices of iron ore futures surged by 50 percent.
But for some investors, volatility has become an advantage, Xiao Chaojiang, who manages Shenzhen Ruike Investment, a fund with $30 million in assets, said he has earned money from shifting from stocks to steel rebar futures to iron ore to soybean meal to cotton. He is now thinking of going into other agricultural sectors.
Economists said that China can keep up with the credit expansion and may also prevent a crisis when the slowdown comes. This is because of the country's closed capital account and vast reserves, in addition to its debt, which is in yuan, and held only domestically.
The report said that Chinese officials are trying to control each bubble as it arises. Experts said that deflating the asset bubbles may be risky for the country as some profitable state businesses rely on the money to roll over other unpaid debts.
"The adage is: There's always a bubble in China," Eric Stein, a portfolio manager at asset manager Eaton Vance who has invested $13 billion around the world, including in China, said.