Financial Bubble: Facts, Theory And Data From China

This article concludes the formation,development,malicious expansion and crisis after the breakdown of financial bubble via reviewing the typical "bubble events" in history and theories about it. It reviews the "Rational Bubble" theory and Minsky's "Financial Instability" theory. And combined with monetary theory from Neo-Cambridge school, we conclude that the basic factors of financial bubble are positive expectations and large quantity of money capital existing in the economy(so called "hot money"), which stems from the imbalance of national economy, which includes inappropriate corporate structure and imbalance of areas' economy. Besides, "hot money" inflow from foreign countries is also an important factor and financial liberalization which causes credit to be embedded in capital market is an important systematic factor that financial bubble maliciously expands, breaks down, and results in financial crisis. Afterwards, this article uses VAR model to do empirical research in Chinese macro economic data, concluding that the financial market in China still needs to develop. In the last part of this article, based on the analysis, we come up with some political advices, including upgrading corporate structure, balancing economies in different areas, expanding domestic demand, increasing domestic investment opportunities, and enforcing superintendency of both domestic financial market and international money flow, etc.