The Chinese stock and property markets have been outperforming expectations, fueled by an unprecedented surge in bank lending. Xie Guozhong, an economist and board member of Rosetta Stone Advisors, argues the robust Chinese economic figures are only propped up by bubbles, whose bursting will lead to a hard landing for the economy. Xie published his opinion in a related article in Caijing Magazine. Edited excerpts follow:

I believe that Chinese stocks and properties are 50 to 100 percent overvalued. The odds are that both will adjust in the fourth quarter of this year.

Chinese asset markets have become a giant Ponzi scheme. Prices are supported by appreciation expectations and as more people and liquidity are drawn into the mix, the resulting surging prices will validate the expectations, which in turn will prompt more people to join the party. This sort of bubble ends when there isn't enough liquidity to feed the financial beast.

The origin of the asset bubble in China is excess liquidity as reflected in the high level of foreign exchange reserves and the low loan deposit ratio.

When the dollar becomes strong again, liquidity could allow China to take advantage of dollar appreciation. That's when the bubble will burst. But it is still difficult to tell when the dollar will turn around.

How far the bubble will expand depends on the government's liquidity policy.

A far less risky approach is to adopt a stop-and-go policy. In it, the government would release a wave of liquidity, as is the current case, and then turn off the tap. The markets will run out of steam when the liquidity is completely absorbed. When these markets fall low enough, the government could release another wave to replenish them. This approach would limit the bubble size.

I expect that this financial maneuver would be the government's preferred policy. If the global downturn continues for the next few years, we could see China's property and stock markets experience major fluctuations every year. I suspect there will be a major slump in both stock and property markets around the National Day holiday (October 1-7).

The stock market once again finds itself in a frenzy, as a growing number of young people, uninterested in real jobs, become addicted to stock market speculation. They witness their holdings' value changing on a daily basis, resulting in profits greater than their monthly salary and creating the illusion that they can become millionaires overnight. But the truth is most of them will lose everything if the markets plummet, with serious social consequences ensuing in the aftermath.

The current trend won't last long, even as ignorant individual investors are continually drawn into the frenzy by the rising momentum. The turnaround may happen in the fourth quarter, with a large loss to investors as liquidity begins to leave the country. The recovery of the dollar, possibly in 2012, could result in a collapse of China's property and stock markets similar to that experienced during the Asian financial crisis in 1997-98.

I want to make myself perfectly clear on China's asset markets today: There are a considerable number of bubbles and their bursting will bring dire consequences to the country.

The belief that the government wouldn't let the market fall is rooted in Chinese market psychology. However, in reality, the government can do very little to reverse the market trend once it turns. The Chinese stock market has gone through many upswings and downturns in the past, only reinforcing the notion that the government is unable to stop the market from falling.