IN most countries, the stock market and the economy move up and down together in a happy union, but in China they have often been distant relatives. That split is widening like never before, with the economy continuing to slow but the stock market taking off, all of which hints at deep dysfunction in the financial system.

Just three months ago, the main Chinese stock market was dormant. Since then, it has surged 30pc and has started to show signs of the manic trading that normally does not appear until a bull market has been gathering steam for years. On some days this month, the trading volumes on the stock exchanges in China have exceeded those of all the others in the world combined. Prices are swinging wildly, with some of them gaining 10pc then losing it all and more within minutes — often in the absence of any news about the company or the economy. Showing classic symptoms of a mania, Chinese investors are borrowing heavily to buy stocks and flipping them quickly. On average, they are holding them for barely two weeks, compared with four months in the US.

This is just the latest frenzy to hit China and its origins date back to 2008. After the global financial crisis hit, Beijing tried to sustain its growth rate by pouring record amounts of money into the economy. Since late 2008, China’s money supply has expanded from $7tn to $20tn, an increase larger than those seen in all other nations put together. There is now more money circulating in the country than in the far larger economy of the US. Yet all this easy money is, on one hand, failing to prevent the economic slowdown, while, on the other, fuelling the stock market and widening the disconnect between the two.

If China continues to feed these frenzies through its monetary policy, the risk will grow that popping asset bubbles will further slow the economy that has been the single largest contributor to global growth this decade. And, if China’s flagging growth rate slowed by another 2pc, that would be enough to slow global growth from the current pace of 2.5pc to less than 2pc, the level widely considered a worldwide recession.

The increase in China’s money supply has already sparked a five-year credit binge, the biggest that any big emerging economy has experienced since the end of the Second World War. The first asset class to inflate was property, with land prices rising 500pc in the decade to 2012.

Then, when the authorities moved to cool property prices by limiting the purchase of second homes, funds started flowing into complicated investment products offered by a motley assortment of non-bank institutions that make up China’s extensive and informal ‘shadow banking’ sector. At one point, the money started to boost business in the casinos of Macau — until a crackdown ended that flow, too.

Every time they tried to flatten one emerging asset bubble, another would pop up somewhere else, suggesting that authorities were losing the game.

With the easy money increasingly going to fuel asset bubbles rather than to promote economic growth, China needs to abandon its unsustainable growth target. The world cannot afford a financial accident in China at a time when the global economy is already on the edge.

Published in Dawn, Economic & Business, December 22th , 2014