Successful initial public offerings of China's several state-owned companies raised billions of dollars in 2006. Millions of Chinese are now buying stocks or mutual funds instead of leaving their money in bank deposits that pay low interest. But this boom in China's stock market will burst like a bubble?

Shares of China Life, China's leading life insurer, soared after the company raised $3.6 billion in its IPO earlier in January 2007. The insurer's high-profile debut on the Shanghai stock exchange was symbolic for the spectacular bull run on China's stock markets since the beginning of last year. China's benchmark Shanghai Composite Index went up 130 percent in 2006, making it one of the world's best performing stock exchanges last year, a boom that started when the government allowed major state-owned companies to list shares on the stock market.

But some analysts say the boom could be a bubble. David Webb, a Hong Kong-based independent market analyst, says he is worried about a lack of economic fundamentals behind the very high gains in stock values. "When people eventually realize that the emperor is not wearing any clothes then the markets tend to crash or at least to correct, whether it happens suddenly or over a period of time varies," he noted. "The mainland has been in this position before because they had a bubble in 2001, which they succeeded in deflating most of about 18 months ago, and they brought it all the way down. But since then it has basically reflated."

Some market analysts have warned that the earnings of many listed Chinese companies are not high enough to justify their current share prices. Howard Gorges, vice-chairman of the South China Brokerage in Hong Kong, says it is hard to predict how the stock market will develop. But while there are worries about a bubble, he says, the outlook for now remains positive. "It seems to be a virtuous circle for the time being - of a lot of money, better quality stocks and by and large a reasonable profits growth of the companies getting listed," he said. "And the outlook for the economy is also for another, perhaps, 10 percent growth in 2007."

Analysts say, however, the central government needs to try to stop the stock market from going up again as sharply as last year to prevent a potential crash. A collapse of the market, which would see millions of Chinese investors lose their savings, could generate severe economic and social repercussions. Hopefully, this worst-case scenario can be held at bay.

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