China is not a country favorable to laws. They get in the Communist Party's way. It is not, what Professor Dixit terms, a rule based system. Rather it maintains a pre-law type of system, a relationship based system. Relationship based systems function under a process known in game theory as reputation. It is also know as second and third party social norms.

Relationship based systems are quite common all over the world and with a few exceptions like India, typical of emerging markets. What Professor Dixit points out is that they do not act like normal markets. They are subject to periods of speculation. Given the lack of transparency and asymmetry of information this should be obvious. The problem of the present bubble in China is not with the A and B share market or with its currency. The problem is more basic. Without rules and especially without free speech no one knows what is going on.

This is not to say that there are not great investments in China. The are a number of US listed companies building casinos in Macao. Since these casinos will be the destination of much of the foreign money invested in China, they will do exceptionally well. One thing is for sure. The American built casinos will be more honest that the Chinese stock market.