Learn from the Bubble

What did the investors and government do after the burst of the bubble? 
They did do their best to minimize the impact, but the process may be much longer. 
There were actually three stages in the process:

From 1994 to 1996, with the promulgation of the national macro-control policy at that time, some visionary real estate developers and financial institutions instinctively disposed of their real estate assets through price reductions, auctions, debt settlement and other methods, which minimized their losses and preserved assets.

From 1996 to 2002, the government organized a comprehensive disposal of real estate losses. The Hainan government has issued regulatory documents that have provided legal weapons for expediting the disposal of the backlog of real estate.

From 2002 to the present, in order to speed up the pace of disposal and revitalize financial assets, the State Council has approved a new plan that for Hainan Provincial Government to set up an asset management company with independent legal personality, which is responsible for managing and disposing of the backlog of real estate transferred by the wholly state-owned commercial bank agreement, and repay the funds to the state-owned commercial banks. The process is still ongoing [1].

The government’s work has nearly done by now, and the first generation of China’s capitalists have recovered from the crisis. But for ordinary people who lost cash, houses, and deposits, their pains are still there in the 1990s.



Back to the topic of money and banking, what indeed, can we learn from this historical event? What’s the actual cause of the bubble and the crisis?

Someone may say that the government's mandatory regulation should be blamed, but the fact is that the regulation only pulled the trigger, the government wanted to release the risk.


The first reason of the crisis and the burst of the bubble is the lack of regulation back in the 1990s, while the market was young and fragile, with millions of people’s expectation and desire, its expansion, and rapid growth was far beyond the rational level.

The second reason is the illness inside the banking system. As Zhu and He suggested in 1999, regardless of government and enterprise, excessive administrative intervention by local governments is the biggest obstacle to the development of local commercial banks. The property right relationship was fuzzy at that time, and the investment subject for banks was not clear. Banks and Hainan local governments did not act as positive roles in the growth of the bubble [2].

A financial crisis may be caused by a bubble in an industry. While the economy seems overheating, the bubble may grow at the same time, and we should never underestimate the impact of a grey rhino.

I hope this series of blogs have a bit of help for you to better understand how a bubble is generated, grew and maybe a threat of economy once out of control. Let me know if you have any comments or ideas.


[1]吴鹤立. 不堪回首忆 “狂潮”——海南房地产泡沫经济沉浮始末[J]. 金融经济, 2003 (11): 7-9.
[2] 朱崇实, 贺绍奇. 商业银行股份化过程中的若干法律问题——兼论海南发展银行的关闭原因[J]. 厦门大学学报 (哲学社会科学版), 1999 (3): 13.