Zuo noted that the second mistake occurred when Japan maintained interest rates at extremely low levels, and worse still was the Japanese central bank's decision to increase its money supply by 1.8 times. A massive amount of money went into the property and stock markets and excessive liquidity popped the price bubble, leading to the financial crisis.

The Southeast Asian financial crisis in 1997 followed a similar path as Japan experienced a decade before. Zuo said it is paramount for authorities to take decisive measures to cope with possible risks caused by international speculative capital.

Hu Xiaolian, Vice Governor of the People's Bank of China, stated at a ministerial level conference of the IMF's International Monetary and Financial Committee on April 14 that all countries should be cautious about the potential risks generated by constant large-scale capital flows, something she said could damage the financial stability of emerging countries.

Other factors driving up reserves

Mei Xinyu, assistant researcher with Chinese Academy of International Trade and Economic Cooperation, commented that because China's capital accounts are not yet open and the access level of the financial market is very limited, it is hard for international institutional investors-especially mutual funds and hedge funds-to maneuver in the Chinese financial market.

Experts suggested other factors have also influenced the swelling reserves.

Funds raised from initial public offerings by overseas-listed enterprises, denominated in foreign currency and sold back to the central bank, have contributed to the ballooning reserves, said Hu.

"China's macroeconomic measures since the second half of last year could have encouraged the banks to place funds offshore to make more profit than if they used the money for domestic lending," said Wang Qing, an economist with Bank of America in Hong Kong. However, recent loosening of policies may have led the banks to pull the money back for domestic lending, Wang contended, adding this was achieved by legitimate currency swaps.

Central bank Vice Governor Wu Xiaoling confirmed that another factor behind foreign exchange reserve jumps is the unraveling of currency transactions between the central bank and commercial banks.

A currency swap involves agreements between two parties to trade a given amount of one currency for another and, after an agreed period of time, to give back the original amount exchanged.

Running of the bulls

Yet amid concerns over speculative money, many are still optimistic about the markets.

In the middle of April, three fund management companies (Yinhua Fund Management Co. Ltd., New Century Fund Management Co. Ltd. and ABNAmro Teda Fund Management Co. Ltd.) issued their second quarter investment strategy reports, all suggesting the macroeconomic situation is sound and stable and the stock market will continue its bullish momentum.

Yinhua Fund Management reported that although rapid economic development has created inflation worries in the Chinese central bank, the fast-growing macroeconomy will strengthen the stock market. This is reflected in the stable high growth of fixed asset investments, positive expectations on exports and the increasing profitability of major listed companies.

Han Zhiguo, head of Beijing Banghe Fortune Research Institute, believes the Chinese stock market will continue to grow amid sharp fluctuations.

"This is due to a combination of positive factors," Han argued, adding that the Chinese stock market is undergoing unprecedented development opportunities.

First of all, he said, the world economy is in a fast and stable development phase. The U.S. economy has witnessed a soft landing and the international oil and metal prices are rebounding-both being good news for Chinese economic development.

Domestically, more positive news is expected to shore up the stock market. For instance, renminbi appreciation expectations, the byproducts of stock reform, the Beijing the 2008 Olympic Games and the World Expo 2010 Shanghai, all could assist the continuance of a bullish market this year.

Han said the biggest winner will be listed securities companies, such as CITIC Securities, and he also contended there should be two major events that trigger adjustments in the stock market, one being the launch of stock index futures and another the income tax on stock transactions.